LinkedIn (NYSE: LNKD), which is a professional social network, launched in 2003 and went public in 2011. The company is considered by many to be overvalued (as many other tech companies). In this post, we will try to find out if the stock is worth buying or not. I can say right away that I own shares and will highlight the reasons why. LinkedIn has really become the largest professional social network on the market which gives them much tailwind. If you are looking for a job, you don't want to a service that have a couple of job listings. You want to go to LinkedIn, where all other lists their jobs. LinkedIn has 350 million members, which is up 25% YOY (Year Over Year) and around 100 million use it every month.
The figures presented at Q4 earnings was surprisingly good...
The figures presented at Q4 earnings was surprisingly good, in conjunction with LinkedIn's Q3 earnings, we received guidance on the year-end quarter from CFO Steve Sordello. He estimated that they would generate between $600-605 million, about 35% above the year before. It turned out that this was far from correct, LinkedIn announced unexpectedly strong Q4 earnings February 5. Revenues rose 44% to $643 million, which topped analyst forecasts. Below you can see a graph where we see LinkedIn's EPS (Earnings Per Share), the gray line represents Wall Street's consensus and the rectangles indicate high & low estimates. The red line shows the company's guidance while the green is the real profits, last quarter were EPS $0.61 while Wall Street was expecting $0.53.
They have been very successful at establishing themselves in the US and has also managed to establish wide outside the States. Of their pageviews are 75% coming from outside the US. Asia is actually growing very fast for them and they have become very big in China (this is something companies can have difficulties with). LinkedIn has many companies in many different industries who use their hiring platform. But many of the industries that they dominate don't grow by much, which means that they need to take on new businesses that not yet fully use their platform if they want to maintain their growth. In industries such as real estate, financial and insurance services, media & telecommunications, and technology, have LinkedIn captured a large part. However, if we check industries as, education/healthcare, business and consumer services, and retail trade, it does not look as good. This says Brian Nowak, an analyst at Morgan Stanley.
They have been very successful at establishing themselves in the US and has also managed to establish wide outside the States.
Below is a picture of LinkedIn's industry penetration from the Bureau of Labor Statistics, Morgan Stanley Research. Those with poorer penetration are selected, this is not only bad because it allows for greater growth. Brian Nowak has done a bull case scenario where he thinks LinkedIn could surge 47% to $375, this is based on a surprise from the company and that more customers than expected are added to their platform. There are challenges ahead, including managing huge costs, continue to diversify revenues and increased competition. But so far have Linkedin little, if any, direct competitors. However, it seems that Facebook (NASDAQ: FB) wants to change that with their service Facebook at Work, which is currently being tested. A handful of companies is currently testing it for internal communications and data-sharing solutions.
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Now, many wonder if Facebook will expand the service and become a competitor to LinkedIn. If it comes to that, which I think is likely, will LinkedIn gonna be alright? Tim Sackett, president of the HRU Technical Resources, said the following. "Facebook is really the only other social media platform that's a threat to LinkedIn's empire." I agree with that, but I still think that LinkedIn will maintain its dominance. If I'm looking for a job, I want something professional and advertisers also seems to want it. The number of sponsored links for LinkedIn is up 3x over the last year, and the price per update of those is up 40%.
If it comes to that, which I think is likely, will LinkedIn gonna be alright?
What distinguishes LinkedIn from other social networks such as Facebook and Twitter (NYSE: TWTR) is that their income not only comes from advertising. Social networks have however become very good at coming up with clever ways to integrate advertising. Instead of advertising "pop-up" they have integrated it in a way so it becomes part of the social engagement and this results in high revenue streams from advertising. But LinkedIn also has a successful premium subscription service, this creates a diversified revenue stream. In addition, to a successful premium subscription plan, has Linkedin also created a high level of social engagement.
Above is post-click engagement compared across social networks, I think it's most interesting to compare LinkedIn with Facebook and Twitter. Compared with LinkedIn, users don't stay as long, don't check as many pages and the bounce rate is higher. (Bounce rate is the percentage of visitors who enters the site and then leave Immediately.) But we can see that Google's (NASDAQ: GOOG) services, YouTube and Google Plus, clearly have the best post-click engagement but it's difficult to compare them with LinkedIn. Anyway, let me return to if the stock is worth buying or not. I own shares as a long-term investment and believe LinkedIn will perform well going forward.
LinkedIn is beginning to diversify revenue from their three primary business units...
LinkedIn is beginning to diversify revenue from their three primary business units: Premium Subscriptions, Marketing and Talent Solutions. LinkedIn's Talent Solutions offers the recruiters tools to find the right person for the job. They make about $1 billion in this business today and LinkedIn think it very well should be able to grow to $10 billion. However, is all this justifying LinkedIn's $32 billion valuation? It's hard to say, you need to look at the big picture. I have great confidence in the management, CEO Jeff Weiner has so far managed the company very well and I expect the same performance going forward. Yes, if you look at today's metrics it seems overvalued and not worth buying. But I still own shares, they make long-term investments and aims to continue to become even more dominant in the market. This suits me because I'm a long-term investor.
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