On the morning of February 4, LinkedIn was a stock-market success story. When Wall Street closed that day, the company’s shares were trading at $192.28, nearly $100 above its 2011 initial public offering price. Also that day, CEO Jeff Weiner announced the company’s first-quarter earnings, which, at $860.7 million, beat analyst expectations and were up 35 percent year-over-year.
All good news, but LinkedIn is one of those all-too-common Silicon Valley companies that loses money; it lost nearly $46 million that quarter. For a company that loses money, growth is currency. On that front, Weiner had bad news on February 4. That 35 percent growth rate was down from the previous quarter, and the company lowered its annual revenue-growth expectation from 35 percent to 21 percent. As a result, LinkedIn’s share price fell to $108.38 the following day — a 43 percent plummet.
LinkedIn’s share prices have recovered, though, thanks to another uncommonly massive one-day spike. This one was precipitated by the announcement Monday that Microsoft will buy the company. On Friday, LinkedIn was trading at $131.08, and Microsoft intends to pay $196 per share, valuing the deal at $26.2 billion. LinkedIn’s shares have promptly risen more than 45 percent. The deal, which will cost Microsoft nearly four times what it paid for Nokia in 2014, is predicated on kick-starting LinkedIn’s flagging growth. The vehicle for this, Weiner and Microsoft CEO Satya Nadella said in a conference call with investors, will be Microsoft’s huge distribution channel.
“We’ve got 433 million users today,” Weiner said, “and you seamlessly integrate that through Microsoft’s global footprint of about 1 billion users, a billion customers that are as relevant as it gets for us.”
Nadella sees the all-cash acquisition as one that will complement the company’s enterprise cloud offerings. During the call with investors, Nadella foresaw LinkedIn being tied into Office 365 and Dynamics products. Bing searches would be peppered with a person’s professional information. But the biggest asset for Microsoft could be LinkedIn’s trove of data, which will only bolster Microsoft’s cloud- and machine-learning-oriented future.
“Think about the analytics we have today inside Office 365; that’s the big differentiator,” Nadella said. “Now combine that with the … insights they have inside the LinkedIn Database. Those combined — that’s where some of our best AI and machine learning will happen.”
The likely first place users will see this artificial intelligence is in the LinkedIn news feed. Instead of showing news deemed relevant based on your organization, industry, and connections, the news feed could become a Facebook-like amalgamation of what algorithms deem important based on your upcoming schedule (thanks to LinkedIn’s new connection with Outlook) and connections the algorithm thinks you need to know. The same integration would kick in from an Office perspective. Nadella sees a function in Office that could connect you to project-related freelancers on LinkedIn, or tutorials through LinkedIn-owned Lynda.
The ideas are nifty, but it’s unclear they alone would bolster profits to a level that justifies the steep markup Microsoft paid. LinkedIn lost $166.1 million in fiscal 2015, but Nadella highlighted monetization strategies such as organization subscriptions and targeted advertising (yet another cue from Facebook).
Elements of the deal — LinkedIn’s data and user base, in particular — are undeniably valuable for Microsoft. But the purchase price would be 91 times LinkedIn’s earnings per share; the normal price-to-earnings ratio for S&P 500 companies is around 20. That kind of spending implies profit potential, which LinkedIn will have to produce if its value is no longer tied to breakneck growth.
If LinkedIn can scoop up some more of Microsoft’s 1.2 billion Office customers, and the data they bring, the value added might be worth the purchase price even if LinkedIn continues to operate at a loss. But if LinkedIn’s growth stalls and Nadella’s monetization strategies fail, then the biggest acquisition in Microsoft history will feel very similar to the Nokia one: A too-late, too-expensive attempt by Microsoft to establish a foothold in an already mature market.