Linkedin’s 3rd Quarter Report for fy 2013 (http://investors NULL.linkedin NULL.com/common/mobile/iphone/releasedetail NULL.cfm?ReleaseID=801343&CompanyID=ABEA-69T44N&MobileID=) included a warning of the likelihood of a miss on revenue and earnings estimates for the 4th quarter, 2013.
Linkedin’s warning, together with Apple’s miss, provide ample indication of the emerging market imperative for these businesses. Without a growth in business from these markets, publicly traded businesses burdened with highly inflated earnings expectations from Wall Street analysts are not likely to sustain ever increasing market capitalization.
What should make average investors even more concerned is the potentially distortion of the true size of a business likely to result from an excessive emphasis of sales growth over other, equally important indicators of business health.
If a healthy product line produces $1M in annual revenue grows by 100% in a specific business quarter, the growth is, no doubt, a success. But to promote the “100% growth” statistics, while neglecting to provide equal emphasis to the comparative small scale of the revenue contributed by the product, can be misleading to average investors.
While the revenue scale is certainly larger in the case of analyst opinions on Linkedin’s growth (we are talking about approx $1 Billion in annual earnings from this business), the bottom line is still the same. There are only so many recruiters in the Americas and Western European markets. LinkedIn saturated this market. The dramatic growth of past quarters, for future quarters, is not sustainable.
Of course an opportunity exists for LinkedIn, and its peers in this inflated market valuation category, to expand their business into truly emerging markets. But if Apple is a reliable indicator, it’s not likely any of these businesses will make the commitment required to open rich revenue streams from emerging markets with consumers constrained by tigher pockets.
It makes sense for average investors to understand the type of hyperbolic coverage represented by industry analyst reports on these companies. Certainly it may make sense to assume a more skeptical attitude when the next meteor emerges from deep in the galaxy.