Online Recruitment Industry: A Reliable Investment?

Ashit is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Monster Worldwide (NYSE: MWW) recently announced its first quarter results. On the back of an uncertain and shaky global economic environment, the company beat market expectations by reporting net income of $5 million during the first quarter of 2013, which is a robust 33% increase. Although revenues posted fell 9%, the market expected an even steeper drop. One of the challenges faced by Monster and its competitor is the cyclical nature of the industry.

As hiring and recruitment highly depends on the macroeconomic environment, Monster is deeply impacted by economic slowdowns that lead to rising unemployment. Such circumstances increase the number of job seekers, but Monster runs on a business model that does not charge job seekers, unlike its competitor LinkedIn (NYSE: LNKD).

Trading at a discount

The 2008 financial crisis weakened several online employment solution providers, including Monster. However, the company has recovered remarkably, but its shares appear to be trading at a reasonable discount. Monster’s stock is trading at 12 times its earnings per share, and at a healthy price-to-book ratio of 1.4. Its net income is higher than its nearest competitor LinkedIn.

The annual return on assets has improved to 3.36% from 3.05% and the current ratio is 0.97, up from 0.86, which is indicative of growing liquidity. The key metric for the company is gross margins, which increased to 55% from 52% previously. Its current valuations suggest that the online recruitment site is gradually building momentum.

Monster has a diversified business model

Monster has a well diversified revenue stream, as it generates revenues primarily through three distinct business segments: Careers-North America, Careers-International, and Internet Advertising and Fees. Unlike its competitors, Monster also offers free services, including educational and financial guidance to attract more online users.

Careers - North American Segment: The job market in North America is showing signs of recovery relative to the international market, especially Europe. North American job listings during 2012 declined 5%, compared to which international job listings exhibited a 30% decline. With the macroeconomic environment in North America expected to improve, Monster will certainly witness a growth in job listings leading to higher revenues.

However, the persistent economic slowdown in Europe may partially offset the growth achieved through the North American region. Monster is making serious efforts to augment its services, as it recently invested in an all new and radically innovative resume search technology. This enables potential employers to categorize candidates by required competences. The initiative offers sophisticated services in order to charge a higher fee from recruiters. However, the existing competitive environment may put downward pressure on prices charged per job posting from recruiters, resulting in less than expected growth in revenues.

Advertisement and Fees Segment: Monster has a definitive plan in place to make an impression in the rapidly growing $30 billion internet advertisement market. Display advertising allows marketers to deliver targeted online advertising messages. Going forward, this segment could be a key driver for Monster's earnings, if it manages to monetize its platform effectively.

Careers - International Segment: International expansion is expected to be driven through two main markets; Europe and Asia. Low online recruitment in Europe presents an opportunity for Monster to grow its presence in an under-penetrated market. However, Asia reported robust growth, hence, Monster must continue to incrementally develop on its success. 

Competitive landscape

LinkedIn is Monster's prime competitor. It has rapidly gained market share in the last few years, with its membership base increasing at a CAGR of 54%. The company recently surpassed  20 million users in India.

The Indian member base now accounts for approximately 9% of LinkedIn's worldwide membership base. This exhibits growing demand for LinkedIn's services in one of the most promising markets. Even though the company is rapidly increasing its presence in emerging markets such as India and Brazil, monetizing its platform effectively still remains a problem.

It is noteworthy that at the end of the first quarter of this year, approximately 64% of total users were international. However, the revenue contribution through this international user base stood at 38%, hence, it underlines the importance of increasing user engagement in order to bolster paid memberships.

LinkedIn’s stock has delivered unparalleled returns to investors so far, however, with growing competition coupled with an economic slowdown in Europe, it could eventually lead to a downward correction in its stock.

Another competitor to Monster is the social networking site Facebook (NASDAQ: FB). Although its earnings have been poor since the company went public, the revenue growth reported during the previous quarter was promising. Facebook is not a direct competitor, but is instead a parallel competitor to Monster, primarily competing through Social Jobs.

The prime objective is to establish strategic partnerships with job sites to create a large pool of job listings. However, so far it is not established enough to pose any serious threat to Monster or LinkedIn, which have spent the last few years building meaningful partnerships with headhunters and various recruiters.

In order to stay ahead of its thriving competition, Facebook needs to follow a strategy that's similar to LinkedIn and Monster's. Online recruitment is now a big and rapidly growing industry, which presents a huge opportunity for the social networking site to branch out its revenue streams.

Conclusion

Monster’s strengths are in multiple areas, such as its compelling growth in net income, attractive valuation and a robust financial position with reasonable debt on its balance sheet. As a cost cutting initiative, it has reduced operations in unprofitable regions. Additionally, it completed a restructuring program that will yield $50 million annually. With strong fundamentals and robust growth potential from the Asia-Pacific region, I believe Monster is a hold for now.

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Ashit Gulati has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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