LinkedIn stock received a downgrade from analysts at Morgan Stanley as a result of decelerating growth in enterprise and Talent Solutions and rising investments in all four of the social network’s businesses. They also warned investors that the company’s platform probably won’t be as big as they thought it would be previously. Their price target comes just a little over a week after another cut from Canaccord Genuity.
Shares of LinkedIn stock slumped by 4.8% to $110.03 following the downgrade.
In a report dated March 16, analyst Brian Nowak and his team said they’ve downgraded LinkedIn stock from Overweight to Equal-weight and cut their price target from $190 to $125 per share. They previously like the social network’s monetization opportunities for a couple of reasons. For one thing, they were assuming “multiple years” of strong growth in Talent Solutions because they expected more and more large enterprise customers and small- to medium-sized businesses to sign on.
Second, they saw “budding new” opportunities like business-to-business advertising, Sales Navigator and Lynda. However, they said LinkedIn’s fourth quarter earnings results, guidance for this year, recent management comments and decelerating growth in large enterprise customers have made them reevaluate their view. They have concluded that they overestimated the social network’s ability to grow its platform while also underestimating the size of the investments that would be needed in order to grow.
The Morgan Stanley team described LinkedIn as “a platform at the crossroads of uncertainty” because it’s unclear whether it can reaccelerate growth in its Talent Solutions business or beat expectations in business-to-business advertising, Lynda or Sales Navigator. They’re also unsure whether investor interest will ever be reignited, driving LinkedIn stock back up toward their bull case, which is set at $200 per share.
They add that if the social network’s deceleration continues to move more quickly than expected or if management does not execute things properly, the stock could remain range-bound, in the best-case scenario, or even move down toward their bear case of $60 per share.
As a result of all these concerns, Nowak and team have cut their estimates for LinkedIn. Specifically for Talent Solutions, they’re cutting their estimates for revenue growth on the back of lower expected field sales. They now think enterprise customer growth for the segment slowed to 16% last year, compared to their previous estimate of 23% growth, which is down from the 32% growth estimated for 2014.
They think both U.S. and international enterprise growth decelerated, and that, with management’s comments that they’re focusing more on small and medium businesses, suggests to them that the social network is “bumping into large enterprise penetration ceilings with its current product offering.” Based on this new belief, they’re estimating a 10% growth in large enterprise customers for this year and 7% for next year.
Talent Solutions growth to slow too
The Morgan Stanley team also expects growth in Online Talent Solutions to slow as field sales make up about 80% of total revenue for the segment, excluding Lynda. They noted that management guided for online self-serve sales to significantly decelerate this year from 30% last year to single-digit growth this year so they have now cut their sales estimate for the segment by 4% for this year.