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Dilantha De Silva
Dilantha De Silva
Articles (182)  | Author's Website |

LinkedIn Will Be a Growth Driver for Microsoft

The social media platform is under-monetized

February 21, 2021 | About:

Microsoft Corp. (NASDAQ:MSFT) was one of the big winners in the market over the last couple of decades, which does not come as a surprise considering its stellar earnings growth during this period.

The company was recognized as one of the leading computer software providers at the turn of the 21st century, but has since grown exponentially to tap into many lucrative industries, such as cloud computing, video gaming and even social media. In 2016, Microsoft acquired LinkedIn, the world's leading social media platform for professionals, by paying a hefty $26 billion. At the time, some investors criticized the move as the path to monetization was not clear. Today, LinkedIn is already contributing to company revenue and, according to a report published by The Information, the platform is planning to launch a new marketplace for freelancers by this fall, which could be a catalyst for Microsoft's earnings growth.

LinkedIn has come a long way since the acquisition

With the completion of the acquisition, Microsoft started consolidating LinkedIn's revenue, starting from the fiscal second quarter of 2017, and the social media platform generated total revenue of $228 million for this quarter. LinkedIn's revenue primarily consists of three products: Talent Solutions, Premium Subscriptions and Marketing Solutions. The number of LinkedIn users has grown exponentially over the last several years to over 700 million as it emerged as one of the best platforms for professionals to search for new career opportunities. As illustrated below, LinkedIn's quarterly revenue has grown at a stellar pace in the last four years.

Source: Business Quant.

For the fiscal second quarter ended December 2020, LinkedIn accounted for approximately 6% of Microsoft revenue, and the contribution has steadily increased since 2017.

LinkedIn is tapping into a high-growth industry

On Feb. 19, The Information published an article revealing LinkedIn's plans to launch a marketplace for freelancers on the social media platform. The idea is to help remote workers who are already active on LinkedIn find work opportunities without leaving LinkedIn. In an exclusive article on the subject, The Information wrote:

"LinkedIn is developing a new service called Marketplaces to let its 740 million users find and book freelancers, pitting it against publicly traded firms such as Upwork and Fiverr, according to two people with direct knowledge of the matter."

To facilitate payments, LinkedIn is said to be developing a digital wallet, meaning freelancers will never have to leave the platform to complete the transaction. Considering the expected growth of concepts such as work from home and gig economy, the decision to launch this marketplace could help Microsoft report substantial growth in earnings in the next decade.

A billion-dollar opportunity

According to data from Statista, there were more than 60 million gig economy participants in the U.S. in 2020, which is more than 37% of the total workforce. By 2028, Statista projects the number of participants to grow to 90 million. This expected growth will create opportunities for freelance platforms. Multiple factors are driving this industry forward:

  1. An increasing number of professionals in every major economic region of the world are embracing the flexibility and freedom associated with the gig economy.
  2. Multinational companies have shown a liking to hiring freelancers to work on projects than hiring full-time employees to keep operating costs low.
  3. The increasing internet penetration rate in countries such as India has enabled developed countries to hire freelancers based in these cost-friendly nations without having to worry about providing visas or maintaining a physical office.

In the next decade, all of these factors will contribute to the expected growth of the gig economy, and LinkedIn's rumored marketplace is likely to emerge as one of the biggest contenders for market share in this lucrative industry.

To gauge a measure of the addressable market opportunity, an investor can evaluate the financial performance of Fiverr International Ltd. (NYSE:FVRR). From reporting just $52 million in revenue for 2017, Fiverr has grown exponentially to report revenue of $190 million for the last 12 months, and the company is expected to breakeven in the next couple of years. LinkedIn, with its massive userbase of over 700 million professionals, stands a chance to take market share from the existing leaders of this industry as the majority of freelancers are already using this social media platform and it would be reasonable to assume that LinkedIn marketplace will be used by many of these gig workers as the professional community is already familiar with this platform.

Microsoft could dominate a few lucrative industries by 2030

In addition to this expected success of LinkedIn's marketplace, Microsoft's other products, such as Office 365, Azure and Xbox, will help the company dominate a few high-growth industries in the next few years, enabling it to report better-than-expected earnings growth. Despite the sheer size of the company, Microsoft cannot be classified as a mature business because of its strong presence in fast-growing business sectors.

The valuation is reasonable

One of the primary obstacles of investing in high-growth tech companies is the sky-high valuation multiples at which these stocks trade. Even though Microsoft's share price has appreciated 370% in the last five years, the stock is still trading at a justifiable forward earnings multiple of 33.18, which is slightly above the information technology sector price-earnings ratio of 31.99. Considering the fact that Microsoft has reported year-over-year revenue growth of 14.18% in comparison to the sector average of just 6.34%, Microsoft deserves to trade at a premium to its peers.

Takeaway

Microsoft is one of the most followed companies on Wall Street, yet there is little said and written about LinkedIn and why it would be a strong driver of company revenue in the coming years. The expected launch of the freelancer marketplace later this year will be a catalyst for LinkedIn's revenue growth, and Microsoft is moving in the right direction to monetize the 740 million userbase of this social media platform. The expected growth in users will also be helpful for the company to improve its average revenue per user as advertisers are likely to bid higher amounts for ad space on the platform. LinkedIn remains under-monetized, and Microsoft's stock appears to be undervalued.

Disclosure: The author does not own any stocks mentioned in this article.

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About the author:

Dilantha De Silva
I am an investment professional with 5-years of experience in financial markets. I specialize in U.S. equities and incorporate a top-down approach to identify developing macro-level trends and the companies that would benefit from such trends. I am a strong believer that the best investment opportunities could be found in under-covered equities.

I currently work with leading financial publications including Refinitiv, Seeking Alpha, ValueWalk, GuruFocus, and TradeGrill to produce investment-related content.

I\\\'m a CFA level 3 candidate and an Associate Member of the Chartered Institute for Securities and Investment (CISI, UK). I am a registered candidate for the Chartered Wealth Manager program as well. During my free time, I enjoy reading.

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