LinkedIn Still Shines Despite First-Quarter Earnings Disappointment

NEW YORK (TheStreet) -- LinkedIn's (LNKD) weaker-than-expected first-quarter earnings report, released April 30, has sent investors heading for the hills, with the stock down 23% over the past two weeks. 

But LinkedIn's continuing operations offer multiple reasons to believe that the stock will ultimately rebound. Sales are growing at roughly 35% a year, and the company faces no formidable competition in professional social networking. The future looks good for LinkedIn, as the company would say.

The company's revenue missed analysts' quarterly estimates for the first time. Revenue totaled $637.7 million in the first quarter, compared to analysts' forecast of $637.8 million, according to Bloomberg.

In addition, LinkedIn forecast second-quarter revenue at $670 million to $675 million, well below analysts' projection of $718.3 million. The company also cut its full-year revenue forecast to $2.9 billion from its previous estimate of $2.93 billion to $2.95 billion.

Still, sales climbed 35% in the quarter. Revenue from Talent Solutions, which focuses on sales to corporations recruiting workers, rose to 62% of total revenue, the highest portion in LinkedIn's four-year history as a public company. Marketing Solutions -- a.k.a. ad revenue -- jumped 38% to $119 million.

"LinkedIn will overcome the problems," said Mark Mahaney, an analyst at RBC Capital Markets. Mahaney has an outperform rating on the stock, saying, "It has a very diversified business model."

The company has three streams of revenue that have the potential to bring in more than $10 billion per year each, he said. Those are Talent Solutions, Marketing Solutions and direct subscriptions. LinkedIn remains in an early growth stage.

Morningstar strategist Rick Summer maintains that LinkedIn has built a wide moat to shield itself against competitors. It clearly stands as the No. 1 site to mix professional and social networking, he wrote in a recent commentary.

"As users build and maintain their professional identities on the company's Web sites, enterprises increase spending with LinkedIn to source job candidates, run 'business-to-business' ad campaigns, and generate sales leads," Summer said. That gives LinkedIn a stellar business model and a user base that "may never leave," he commented. LinkedIn has 364 million members.

To be sure, LinkedIn does face hurdles. Ironically, some of those stem from the company's own success. "The ability to execute well in a high-growth environment sounds easy, but it isn't," Mahaney said.

One big problem is finding high-skilled workers.

"Recruiting talented salespeople and engineers in an unusually competitive environment raises challenges," Mahaney said. "The risk is that you have to pay more to hire and retain people." Employee churn rates increase during these periods. There's an interesting irony here -- the company that helps other companies find workers may struggle to find workers itself.

LinkedIn suffered a different sort of churn in the first quarter: enterprise churn. Several of its large corporate customers cut their spending on LinkedIn, particularly in the oil and gas sector.

But Summer expects the churn rate to subside, boosting revenue and operating leverage.

Overall, he and Mahaney offer a rosy outlook for the company. "Even though LinkedIn has made missteps, they generally have executed well over the last three to five years," Mahaney said.

Summer calculates fair value for the company at $225. Mahaney has a 12-month price target of $275. In midday trading Wednesday, LinkedIn was trading around $192.50.

This article is commentary by an independent contributor. At the time of publication, the author owned LNKD.

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