LinkedIn (NYSE:LNKD) is a social media platform for grownups. LNKD was introduced as a way for professionals to connect with other professionals, which has helped Millennials who stay at a job an average of 4.4 years leverage their network into better job offerings. LNKD also allows companies to post job listings, allowing them to have access to a better lead generator than posting on a regular job site. LinkedIn members are encouraged to build a profile resembling a resume and build up their connections. As most stocks in the economy, especially social media stocks, LNKD is overvalued. LNKD is priced at 9 times book value, $1.33 in free cash flow per share at a P/FCF ratio of 187. However, I think LNKD is a better business than most of the other social media stocks, and here's why.
LinkedIn focused on a niche market, professionals. While most companies want to get big fast in order to leverage their user base to advertising companies, LNKD went after the professional. Limiting how content is shared and focusing on creating a platform that allows professionals to advertise their resumes, LinkedIn completely differentiated itself from the rest of the social media pack. This wasn’t microblogging or sharing photos and status updates with family and friends. This was a way for Millennials to promote themselves in a whole new way. Beefing up your profile was now even more important than just beefing up your resume.
LinkedIn was not only able to go after a particular clientele, LinkedIn was also able to create a different type of revenue stream. Most social media companies generate income by selling advertising space. While this is part of LinkedIn’s strategy, LinkedIn is able to do something most social media companies can’t do, and that’s charge its members and business clients. LinkedIn allows members to upgrade their profile, allowing them to have access to more deluxe features. Businesses with profiles can also pay a premium in order to gain access to better features. By creating a great product for everyone to use, and a premium service billed monthly, LinkedIn can use the tried and true model of offering basic services to all customers and charging a higher price to those who are willing to pay for it. This would be hard for most social media companies to replicate, since their platforms aren’t built to support this kind of strategy.
LinkedIn has done a phenomenal job of taking the concepts of a job board/listing, recruiters, and self-promotion and making them social. Of course, LNKD is overvalued, but it has definitely created a better business model than most of the other overvalued social media companies.