LinkedIn Thrown for a Loop
LinkedIn (LNKD: Nasdaq)
By MKM Partners ($112.43, April 8, 2016)
While LinkedIn stock has already been dramatically revalued and we remain positive long-term, we think risk-reward is not favorable in the near term and are moving to the sidelines and downgrading to Neutral from Buy.
[We lower the target price to $130 from $150.]
LinkedIn (ticker: LNKD LNKD -3.548874855465623% LinkedIn Corp. Cl A U.S.: NYSE USD108.44 -3.99 -3.548874855465623% /Date(1460149210438-0500)/ Volume (Delayed 15m) : 4203102 AFTER HOURS USD108.16 -0.280000000000001 -0.25820730357801547% Volume (Delayed 15m) : 17230 P/E Ratio N/A Market Cap 14323678697.6703 Dividend Yield N/A Rev. per Employee 319129 More quote details and news » LNKD in Your Value Your Change Short position ) has been the worst-performing stock within the broader Internet sector this quarter, down 41% since before its last report (versus the Nasdaq Composite up 8%). We think expectations are low and that the valuation collapse is overdone, but we also think it will take multiple quarters to repair sentiment. In the interim, we think that any softness will be interpreted as a disaster for the core business. While we disagree with this view, we have become more concerned with macro trends (namely jobs) and LinkedIn has direct exposure that Internet peers do not. We do not like this setup, are not comfortable recommending the stock in the near term and prefer to “tap-out” ahead of the quarter.
The majority of LinkedIn’s business is related to recruiting and job seekers. Growth in online job postings has been a tailwind, but appears to have peaked and online postings declined in the first quarter for the first time since the recovery began six years ago. The addressable market for Hiring Solutions is key to the bull thesis and a primary point of controversy on the stock. We think that any softness in this business, even if macro-driven, would be interpreted as a total addressable market (TAM) issue.
LinkedIn’s Talent Solutions business appears to show directional correlation with online jobs listings. Data on U.S. online job listings have turned down sharply for the first quarter and indicators suggest the forward trend is downward. It is unlikely that international would offset any decline in the U.S. Management has already noted cautious macro signs in Europe, the Middle East and Africa (EMEA) and Asia Pacific (APAC) last quarter and through conference presentations through the first quarter.
We are lowering our estimates and our target multiple. Our new 2016 forecast for $3.6 billion in revenue is the low-end of guidance and below consensus. Our earnings before interest, taxes, depreciation and amortization (Ebitda) forecast of $974 million in 2016 is 5% below previous and $1.2 billion for 2017 is 13% lower. LinkedIn has already been revalued lower, trading at 13 times 2016 estimated Ebitda, below Internet comps and in-line with Twitter ( TWTR TWTR -1.9434628975265018% Twitter Inc. U.S.: NYSE USD16.65 -0.33 -1.9434628975265018% /Date(1460149375185-0500)/ Volume (Delayed 15m) : 18623774 AFTER HOURS USD16.58 -0.0700000000000003 -0.42042042042042044% Volume (Delayed 15m) : 60206 P/E Ratio N/A Market Cap 11617137853.3455 Dividend Yield N/A Rev. per Employee 569018 More quote details and news » TWTR in Your Value Your Change Short position ). The group of software-as-a-service (SaaS) comps still averages over 60 times Ebitda. Our new fair-value price target of $130 is 12 times our lowered 2017 Ebitda estimate (our prior price target of $150 was 13 times prior 2017 Ebitda estimate).
For a sustainable improvement in sentiment, we would look to, in order: 1) a re-acceleration in hiring revenue; 2) a breakout in sales solutions; 3) a sustainable inflection in user engagement metrics; and 4) Momentum in the acquired eLearning business
— Rob Sanderson
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