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Market Update

LinkedIn Connects on 4Q Results, but Still Overvalued

This wide-moat firm is prudently investing to support its moat, but we can't justify today's stock price, says Morningstar's Rick Summer.

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 LinkedIn (LNKD) announced results for its fourth quarter that were generally in line with our revenue, adjusted EBITDA, and operating cash flow forecast, but the company outlook for 2014 is below our current models. Presently, our fair value estimate remains the same, as the downward revision of our forecast is likely offset by cash earned throughout 2013. In our view, this wide-moat firm is prudently investing to support its moat, though we consider the shares overvalued. We would prefer a margin of safety before recommending an investment.

LinkedIn's revenue grew 47% to $447 million, paced by the Talent Solutions segment which grew 56% versus 2012 to $246 million. For our purposes, continued strength in this segment is evidence of LinkedIn's unique ownership of the professional identity, both for employers spending money searching for job candidates and for professionals who use the website and its applications. This segment continues to perform well, and the stable ARPUs, or average revenue per user for corporate customers, are encouraging, even though new customers are typically smaller and spend less money than the more established customer base. Furthermore, within Talent Solutions, approximately 50% of revenue is recurring, versus 40% a year ago. These results are promising, and they further support our current thesis and valuation.

We're also encouraged by the company's success in the premium subscriptions segment, which includes individual subscriptions. This segment includes products that allow deeper access to the professional network, and sales solutions to generate sales leads. This segment expanded revenue by 48% to $88 million, or 20% of the company's top line. We believe that LinkedIn's user database can provide fantastic capabilities for lead generation, and some near-term acceleration may be likely. Of course, the company will need to optimize and limit the ability of users' access to other users or risk people decreasing their usage of LinkedIn's applications. At first glance, we expect the company to easily reach its 2014 revenue and adjusted EBITDA targets of $2.035 billion and $490 million, respectively.

We expect 2014 to be another year of investment, as the company invests in its sales organization to increase sales at existing accounts, while also supporting development of new products to drive revenue and user engagement. LinkedIn's registered users grew by 31% to 276.8 million, while page views (both desktop and mobile) grew 48%. This user growth and engagement is important to support the other side of the marketplace: advertisers and employers.

Lastly, the company announced an acquisition of Bright, a technology company that provides algorithms matching employers and employees, for approximately $120 million in stock and cash. That amount is immaterial to our fair value estimate, and for perspective, represents about 30% of the 2013 research and development expense. Given the size of the deal and the complementary nature of the technology, we think the deal likely makes sense, though it doesn't affect our fair value estimate for now.

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Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.