LinkedIn Corp. (LNKD, Financial), along with its subsidiaries, offers the largest social network for professionals on the Internet, with more than 259 million members. The customized website allows users to create, manage and share their professional identities in the virtual world, as well as connect and help them search for business opportunities. Furthermore, LinkedIn provides through its Internet platform different applications for searching, connecting and communicating, available for all mobile devices.
The company’s revenue comes from three sources: hiring solutions for employers, known as Talent Solutions, Marketing Solutions such as online advertising, and Premium Subscriptions. Talent Solutions derives its revenue from the sale of the company’s Corporate Solutions and LinkedIn Jobs products, while the Marketing Solution segment generates revenue from the fees received from marketers such as advertising agencies and direct advertisers. Premium Subscriptions gathers the company’s Business, Business Plus, and Executive subscriptions, both monthly and annually. Currently, almost half the company’s revenue is generated outside the U.S.
This stock is known for its high-price history, and has been giving solid results for quite some time now; nevertheless, analysts have started to diverge from the strong confidence position on this stock due to its volatile share price year over year, wondering whether the new products will add to the company’s revenue or make it incur higher expenses and fewer growth opportunities. The recent management’s announcements of expansion plans into China, as well as the $120 million acquisition of Bright, made some analysts stick to a buy recommendation. With a market capitalization of more than $25 billion and long-term EPS growth of more than 38%, the company is still a premium stock.
Where It stands
LinkedIn is the most popular job search website in the U.S., being able to successfully bridge the gap between job seekers and recruiters. The expansion of the Talent Solution segment, which grew to $246 million, 56% versus 2012, resulted in revenue growth of 47%, to $447 million, showing LinkedIn is still the leading online network for seeking and finding employees. Although the company isn’t facing any major competition in its market niche, this scenario might change as a company like Facebook Inc. (FB, Financial) might start professional networking.
LinkedIn lacks technology to record or manage the strength of user relationships, partly due to the fact that the company doesn’t have a direct way of tagging relationships with a field, as well as because of its concept of trusted connections. Moreover, security represents a major concern for the company. In case of compromising the website’s security measures, the company would be subjected to a huge membership reduction and facing social doom. On top of that, the rate of membership growth hasn’t been so strong, slowing from 39.0% to 37.0% year over year. Nevertheless, the launch of innovative products for mobile devices has helped increase the number of memberships and unique visitors significantly.
New Innovations
LinkedIn developed a service under the Talent Solution segment, the Recruiter 2.0, which has increased exchange between employers and candidates. This advanced technology enables users to import data to the application page, as well as to refer specific candidates for a particular position. This introduction indeed has contributed to the company’s revenue growth over the last quarters, and is still to bring about more revenue in the coming quarters. The mobile segment is expected to consolidate the company’s position in the professional networking space. As far as the Marketing Solutions segment is concerned, the highly targeted and engaging ad units it provides, as well as the introduction of customized solutions for corporate clients, has helped different companies reduce their candidate selection and recruitment costs. For LinkedIn, this business model means generating a wholesale business on a recurrent basis.
The recent acquisition of Bright to enhance the matching job system is expected to cost $120 million for the company, of which approximately 27% will be paid in cash, and the other 73% in stocks. Last year LinkedIn acquired Pulse, a news reading and mobile content distribution company that gathers content from the Internet. With more than 9 million users in the U.S., Pulse added new technology and products to the company’s portfolio. Throughout these acquisitions, the firm seeks to deliver more value to its members and expand its customer base, generating new revenue streams.
Nevertheless, the forecast for 2014 isn’t so bright. Some analysts expect margins to lag due to heavy investments in product innovation and marketing strategies, impacting near-term profitability.
Chinese Venture
China is known to have one of the most compelling emerging markets in the globe these days. The Chinese have search engines like Baidu, Zhaopin and 51job, and the majority use Google (GOOG, Financial). LinkedIn is the only social network that is not blocked in China. The company has developed a variant of its website within China, adapting to the market’s requirements and using domestic Chinese language.
Moreover, the company has partnered with local players, Sequoia China and CBC in order to strengthen its roots in the market. This network is yet to develop its full potential, since only 4 million members have signed up in a decade. More accounts are being registered, and this implies more premium users, revenue and clicks on advertisement. Approximately 140 million new subscriptions are expected for 2014 by LinkedIn’s management. Despite these promising expectations, China’s culture and local norms may limit the firm’s expansion in the country, and the domestic competition is certainly a setback.
Final Comment
LinkedIn has been enhancing its services to better cater to the need of its members, developing the new Talent Solutions segment, acquiring Bright, and expanding in China. However, the industry carries high risk, and investors should take a closer look at this company’s performance in order to evaluate its long-term performance estimations. For the time being, LinkedIn is the leading company in the networking-professional panorama; however, Facebook might decide to enter and capture some of the company’s member base.
Disclosure: Damian Illia holds no position in any stocks mentioned.
