Earnings Preview: LinkedIn

 | Feb 06, 2014 | 1:30 PM EST
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LinkedIn (LNKD) will report fourth-quarter fiscal 2013 earnings after the close. I want to quickly outline what to expect. In the past, I've been critical of LinkedIn. In 2012, I called the company a glorified Rolodex whose stock was bound to get cut in half. But investors have ignored my advice and kept buying the stock until recently.

The stock is almost 18% off its 52-week high, as investors have grown increasingly concerned that the company's growth is slowing. Analysts are expecting fourth-quarter fiscal revenue of $437.8 million and $0.84 a share in earnings. For the year, investors expect total revenue of $1.5 billion and $3.63 per share.

Here's my problem with LinkedIn. In fiscal 2012, revenue grew 86%. But the estimate for this year, 2014, is half that. While 42% revenue growth is great, it's quite a comedown. In just two years, revenue growth got cut in half. How did that happen?

User engagement has flattened out. While membership increased 38% year over year to 259 million members, unique visitors flattened out sequentially. In the second quarter, LinkedIn reported 143 million unique users. But by the third quarter, unique users were just 142 million. Unique users were up 29% year over year. According to comScore, page views topped out at 11.7 billion pages in the second quarter. Third-quarter page views were 11.6 billion, flat with the previous quarter. Why? Have users grown bored with LinkedIn?

Analyst estimates are just 4% above company guidance, and that is unusual for a growth company. Usually, there is a wide discrepancy between analyst estimates and company guidance, as the analyst community tries to make up for intentionally low guidance by management. In this case, it seems that analysts believe the company will only marginally exceed guidance and not deliver a blowout quarter. You need a blowout quarter to drive the stock higher.

To stay invested in LinkedIn, you better hope the company finds more ways to grow. Right now, investors are paying 12x 2014 sales and 104x earnings per share. Management needs to reignite user engagement, page views and revenue growth. I don't believe that investors will stick around for a company whose growth rate is forecast to decline another 30% in the next two years. Maybe I'm wrong and the stock can continue higher, but I just don't see it.

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