3 Reasons LinkedIn Corp. Stock Could Rise

By Markets Fool.com

What a Q1 it was for LinkedIn . On the upside, LinkedIn's revenue jumped an impressive 35% year over year to $638 million. Non-GAAP (excluding one-time items) earnings per share also dramatically improved to $0.57, a 50% increase over last year.

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LinkedIn's expenses rose because of a hiring binge, as CFO Steve Sordello had forewarned -- LinkedIn doubled the size of its workforce compared with 2014's first quarter -- so no real surprise there.

Beating revenue expectations and growing its bottom line year over year would have been cause for celebration, considering it was the eighth straight quarter that LinkedIn beat the Street. But then the other shoe dropped: LinkedIn dramatically reduced both revenue and EPS guidance for the balance of this year. The result? LinkedIn's stock price plummeted about $55 a share overnight.

So what could turn it around? Several things.

Oversold, undervalued
For long-term investors, the huge sell-off of LinkedIn shares following its negative guidance could be seen as an early birthday present. Sure, a bevy of analysts have lowered their share price targets, but their negative sentiments speak volumes about LinkedIn's long-term prospects.

As of this writing, LinkedIn is trading around $200 a share. Now, consider that a few of the recent analyst "downgrades" have adjusted their respective target prices to $250, $307, and $285 a share. In other words, these analysts still think LinkedIn shares are about 25% undervalued. While analyst recommendations in and of themselves are hardly a reason to invest in any stock, in this instance the "lowered" price targets for LinkedIn are telling.

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It's no secret that investors -- particularly those of the short-term nature -- tend to overreact, to both good and bad news. The important thing to remember following LinkedIn's Q1 announcement is that the fundamentals still look good: It's continuing to grow revenue, members, and each of its three primary business segments by about 30% year over year -- or more -- every quarter.

Impressive member growth
Despite its somewhat niche market of attracting professionals interested in job searches and networking, LinkedIn continues to grow its member base, quarter in and quarter out. LinkedIn ended 2014 with 347 million members, which was a 25% improvement compared with Q4 2013. In 2015's first quarter, LinkedIn grew its member base another 17 million, to 364 million users.

To put LinkedIn's member growth into perspective, Twitter upped its monthly average users, or MAUs, by 14 million in 2015's first quarter, compared with Q4 of last year, to just 302 million. What makes LinkedIn's member growth so impressive by comparison is that Twitter is essentially targeting most anyone with an Internet connection. Like its big brother Facebook, Twitter is a social-media alternative for the masses.

Yet LinkedIn continues to attract more members each quarter than Twitter, despite its narrower focus. Some of that disparity is a function of Twitter's difficulties in turning viewers into MAUs, but that doesn't detract from LinkedIn's stellar user base growth, and that bodes well for the future.

Back to the basics
LinkedIn's fundamentals in Q1 were more than just sound: They beat both its own and industry pundits' expectations. Yes, as Sordello and CEO Jeff Weiner pointed out, LinkedIn had underestimated customer-acquisition costs as the company incorporates its new salespeople. Unexpected declines in Europe-based banner ads were another negative surprise. But the fundamentals that were the basis for LinkedIn's sky-high expectations before its Q1 report haven't changed.

For example, the Q2 revenue forecast now suggests that LinkedIn will generate between $670 million and $675 million. In Q2 2014, LinkedIn reported slightly under $534 million in sales. In other words, on the low end of LinkedIn's guidance -- which historically it always beats -- investors will see about a 25% improvement in revenue this quarter, and about 30% for the year.

In the near term, LinkedIn is likely to be the target of more bears than bulls; that's the nature of the investing beast. However, there are several reasons patient investors in search of long-term growth ought to take a look at LinkedIn right now.

The article 3 Reasons LinkedIn Corp. Stock Could Rise originally appeared on Fool.com.

Tim Brugger has no position in any stocks mentioned. The Motley Fool recommends Facebook, LinkedIn, and Twitter. The Motley Fool owns shares of Facebook, LinkedIn, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.