Last Thursday LinkedIn (LNKD) reported first-quarter earnings, and investors jumped for joy. Wall Street analysts slapped a $140 price target on the stock and burned up the phone lines making sure their best customers heard the news. But I believe this stock will easily get cut in half. LinkedIn investors are totally disconnected from reality.
I know, I know -- you think it's some kind of valuation call, right? The stock is up 75% year-to-date and is trading at a ridiculous 1,200x 2012 GAAP estimates of $0.09, so you think I'm worried about valuation, right? Wrong. I think slowing revenue growth and out-of-control expenses will trip up LinkedIn. Isn't this company just building a headhunting firm on the Internet? LinkedIn is the Web 2.0 version of Robert Half (RHI). What's so special about that? Been there, done that.
If you look at the company's slide deck from the company's first-quarter presentation, it's not very hard to see that revenue growth has already slowed. On slide five, revenue growth peaked during the third quarter of last year. It's on the chart. You can't miss it. I didn't listen to the conference call, so I didn't hear what management said about the slowdown in revenue growth, but I would think they would blame seasonality. Why not? Everybody else does. In the previous first quarters, revenue growth accelerated. Shouldn't that trend continue if they are on some humungous revenue run for the roses? Don't growth companies power through seasonality?
The big jump in revenue growth came from "hiring solutions," which is a fancy way of saying headhunting. LinkedIn has been aggressively staffing up ("onboarding"), trying to sell large corporate customers on their "passive recruiting at scale," which "adds a social relevancy to active job searches." Hiring solutions revenue was up 121% year over year. But that shouldn't be a surprise. When you add salespeople, revenue goes up -- until it doesn't.While revenue grew 100% year over year, sales and marketing expense rose 124%. The company also aggressively ramped up general and administrative expenses, which was up 83%. You may say LinkedIn is investing for its future. But what is the future? Isn't it what Robert Half does? Sell corporate human resources departments on its recruiting services? Hire us and we'll find you great employees? So they do it through the Internet instead of a Roledex. Big deal. If you look at Robert Half, the company has an operating margin of 7.2% and a profit margin of 4.3%, which is better than LinkedIn's respective 5.7% and 2.4%. From the performance of the stock, you'd think LinkedIn was hugely profitable. You'd think they found a better way to recruit workers. But they really haven't.
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