LinkedIn's ( LNKD ) stock fell last week following its Q1 2014 earnings report. Even though the revenue growth was strong across all its segments, it was down meaningfully from last year. However, this was not unexpected and we believe that the market's reaction was in fact the continued correction from previous exorbitant valuation. The business is still expanding both in the U.S. and international geographies. The company has crossed 300 million registered members globally and 100 million in the U.S. alone. The introduction of new features, influencer program, media rich profiles and mobile focus have helped it create an engaging platform for professionals. This fueled 46% growth in LinkedIn's overall revenues during the first quarter of 2014. For the full year, the company expects revenues of roughly $2.06 billion to $2.08 billion whereas consensus estimates peg the figure a little higher. We believe that LinkedIn's free cash flow growth could touch 50% this year assuming that its net working capital as a percentage of sales declines by 4% to 5%.
Our price estimate for LinkedIn stands at $134 , implying a discount of little over 10% to the market price.
Monetization Is Increasing Amid Slowing Revenue Growth
Compared to more than 72% revenue growth observed in Q1 2013, the figure for the first quarter of 2014 dropped to 46%. This tends to happen as the business matures. The rate at which LinkedIn was adding subscribers has come down, and key metrics such as revenue per customer and revenue per page view are facing tougher comparison. That's not necessarily bad as long as the company continues to show some meaningful growth and stays defiant against new entrants alongside warding off the competitive threat from existing players such as Monster.
It is interesting to note that in the last two years, LinkedIn has managed to increase engagement per visiting member by more than 40% on the back of new features and technical enhancements. This has directly translated into strong growth in the overall data pool which LinkedIn can leverage to connect candidates and recruiters with greater accuracy. These improvements have led to a substantial increase in ad monetization, revenue per corporate customer and the total number of corporate customers. We expect these business drivers to grow by 15%, 30% and 7% respectively this year which will help the company combat its increasing R&D (research and development) and SG&A (selling, general and administrative) costs.
The crux is that while the topline growth is coming down, the monetization is improving, which bodes well for LinkedIn's long term profitability.
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