LinkedIn and Monster Have Work to Do

 | Feb 13, 2013 | 11:30 AM EST
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Last Thursday, LinkedIn (LNKD) announced results for its fourth quarter and fiscal year 2012, and the stock shot into the stratosphere. Management will be meeting with investors over the next month to keep up the good vibrations. LinkedIn's success is coming from the demise of Monster Worldwide (MWW).

Monster and LinkedIn both reported results that day, and their reports couldn't be more different. Monster reported in-line earnings per share and a 10% decline in revenue. LinkedIn reported a fabulous quarter that blew away the most optimistic forecast. For the fourth quarter, LinkedIn grew revenue 80.95% to $304 million. The stock jumped 21% as overjoyed investors celebrated the news.

Monster, as one of the innovators of job search on the Internet, has been challenged by a series of disastrous mistakes. First, the company rapidly expanded overseas, and that increased sales and marketing costs and brought in little revenue. Second, Monster failed to take full advantage of the shift to social media. And third, Monster was blindsided by the free job-search site Monster has had to scramble. It closed operations in China, Brazil, Mexico and Turkey. The changes cut about $130 million out of its operating expenses. Because of the retrenchment, revenue fell $50 million.

In the fourth quarter, Monster's bookings in Europe slid 30%, while North American bookings fell 3% in a recovering job market.  Operating margin declined significantly to 7.2%, from 12.8% in the year-ago quarter. Operating margin declined 20 basis points on a sequential basis. The weak results were due to a sharp rise in operating expenses, which as a percentage of revenue jumped 560 basis points from the year-ago quarter. The rise in operating expense was due to higher sales and marketing expenses. Net margin was cut in half, to 4.1%, compared with 9.5% in the year-ago quarter and down from 7.4% in the previous quarter.

LinkedIn, on the other hand, reported stellar results. The social-networking company is quickly becoming a giant. For fiscal 2012, revenue increased 86% to $972.3 million. The subscription business rose 79%, marketing solutions jumped 68%, and the recruiting business increased 90%.

As for the stocks, it's tough. Clearly, Monster Worldwide has become an also-ran in a market it innovated. It has been unable to get any growth going despite a recovering economy. Only two possibilities, an acquisition or a meaningful recovery in revenue, would lift Monster's shares.

While LinkedIn does have a lot of excitement behind it, growth is slowing. In fact, estimates show revenue growing only 53% in fiscal 2013 and 39% in 2014. That's a steep drop-off from 86%. To me, that means LinkedIn's addressable market is smaller than it seems. By 2014, LinkedIn's revenue would only be $2 billion, and it would generate some $250 million in net income.

At $155, LinkedIn's stock is trading at 75x 2014 estimates. While growth investors don't care about the stock valuation right now, the company better put up more than 53% revenue growth in 2013 to keep the shares moving higher. Both companies have more work to do.

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