Has LinkedIn's Platform Peaked Already?

By Markets Fool.com

Image source: LinkedIn.

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Professional networker LinkedIn suffered a particularly brutal sell-off last month after earnings, and now Morgan Stanley is adding insult to injury.

The investment bank downgraded shares of LinkedIn today amid concerns about the company's continued ability to grow its member base while also improving monetization. Analyst Brian Nowak has dropped his rating on the stock from overweight to equal weight, which is effectively moving from buy to hold. Nowak's price target also falls from $190 to $125.

Enterprise customer growth is slowing
There are several factors contributing to the downgrade. First off and perhaps most important, LinkedIn's enterprise customer growth has decelerated in a big way in recent quarters. These are the customers that drive the core Talent Solutions business, and much of LinkedIn's future growth has been predicated on the idea that the company could continue growing enterprise customers at a healthy pace.

For reference, LinkedIn now has just shy of 43,000 corporate solutions customers. While it is quite impressive how LinkedIn has grown this figure in absolute terms...

Data source: SEC filings.

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... the deceleration is undeniable and this is what analysts are concerned with.

Data source: SEC filings.

Of course, some deceleration is always inevitable as companies grow metrics from small bases, but in this case it's happening a little bit sooner than expected.

Peer pressure
On the monetization front, Nowak was bullish on other ways for LinkedIn to bolster sales, including B2B advertising, the Lynda acquisition, and Sales Navigator. Here's where LinkedIn's lackluster 2016 guidance comes into play.

The Bizo acquisition was intended to strengthen LinkedIn's B2B capabilities, but initial demand for Lead Accelerator fizzled out quickly and the company is shuttering the product while eating a $50 million write-off. CEO Jeff Weiner acknowledged that integrating and scaling Lynda will require greater investments than previously anticipated. Sales Navigator is performing decently and enjoys high satisfaction and engagement, but still just needs more time to grow.

All together, Nowak is cutting cash flow and EBITDA estimates, while adding in the possibility of greater executions risks. The analyst is also adjusting the peer comparable group, from SaaS to Internet platform ( which affects what type of valuation multiples are applicable), downwards.

It's not over yet
I've been a LinkedIn shareholder for a few years now, and last quarter definitely left a lot to be desired. There's still some potential opportunity in China, although it's quite far away. The company now has over 13 million users in China, a tiny sliver of the working population. But it's going to take some time to grow that user base, and even longer to build up the enterprise business around those users.

LinkedIn remains a solid business, but what investors now have to accept a reset in terms of the company's growth expectations and related valuation metrics.

The article Has LinkedIn's Platform Peaked Already? originally appeared on Fool.com.

Evan Niu, CFA owns shares of LinkedIn. The Motley Fool owns shares of and recommends LinkedIn. 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.