If You Like LinkedIn, You Must Like Facebook
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since Facebook's (NASDAQ: FB) spectacular IPO flop, there has been no shortage of reasons to dislike the company. Whether it be lofty valuations, poor corporate governance, problems monetizing mobile platforms, or the IPO process itself, every pundit, trader, and money-manager seems to have their reason to hate Facebook. Moreover, after many of these attacks the aforementioned pundit, trader, or manager will recommend LinkedIn (NYSE: LNKD) as a better investment. While I'm still unsure where Facebook will rank in the history books, I am confident that if you like LinkedIn as an investment, you have to like Facebook.
The main argument I hear from those who favor LinkedIn over Facebook is LinkedIn has revenue streams outside of advertising. LinkedIn charges for its Corporate Solutions, Jobs, and Subscriptions services, which aid enterprises with advertising job opportunities and managing job searches. While these businesses are a nice complement to LinkedIn's Ads business, Monster Worldwide (NYSE: MWW) operates in all of them and rarely garners any attention. The fact that Monster's enterprise value is under $1 billion (compared with just under $9 billion for LinkedIn) when Monster has 66% more sales and 235% more in income, shows me that the market is not actually valuing LinkedIn based on its services business.
Obviously, LinkedIn's growth rate comes into play when comparing these companies; however, the company would have to grow its income more than 30 times what it earned last year to justify its current market cap. Considering LinkedIn's superior growth rate, I would be comfortable valuing LinkedIn at most at 2 to 3 times Monster, making it a $2 to $3 billion company. Now, the LinkedIn-bull (properly) points out that LinkedIn is worth more than Monster because the social network its services are built on provide a competitive advantage.
Facebook on the other hand, relies entirely on advertising for its revenue. However, it would be naïve to assume that Facebook will be unable to find alternative revenue streams in the future. Moreover, I argue the uncertainty of the revenue model is built into the stock price (Facebook trades at 43 times forward earning; LinkedIn at 77). Lastly, although LinkedIn's other revenue streams provide some diversity, the move toward mobile ads will negatively impact LinkedIn. Thus, if you are concerned about Facebook for that reason, you should also worry about LinkedIn, granted to a lesser extent.
What Makes a Social Network Valuable?
The second argument I hear most from those who shun Facebook in favor of LinkedIn: LinkedIn's members have jobs and money, and thus, they are more attractive to advertisers. After a reminder that quantity often makes up for quality, the LinkedIn-bull's argument becomes: Why does anyone care about what someone they went to high school with had for lunch?
These arguments often come with familiarity bias. Because LinkedIn is the most useful social network in many Wall Streeter's lives, they incorrectly assume the roles LinkedIn and Facebook play in the average person's life. Rather than assuming everyone else's preferences match their own, Wall Street should look at data. Facebook has almost 6 times as many members as LinkedIn, and Facebook's visitors spend around 20 times as many minutes per month on the site than do visitors of LinkedIn. If LinkedIn's 20 million unique monthly U.S. visitors are worth $9 billion, than Facebook's 170 million active users should justify the company's $60 billion valuation (using LinkedIn's value per user we come to a $76.5 billion valuation; discounting for LinkedIn's “better” users, we see the current valuation isn't too stretched).
The last argument pundits will use to justify their preference for LinkedIn over Facebook is growth. LinkedIn has grown revenues at an impressive clip (52% from 08-09, 102% from 09-10, 115% from 10-11). However, Facebook grew revenues at an equally impressive clip in those three years, posting growth rates of 186%, 154%, and 88% from 08-09 to 10-11, respectively. The real difference in the companies' growth rates shows up in the most recent quarter where Facebook's revenue decreased by 60% quarter over quarter (LinkedIn's came in at 12%) and in future quarters, where Facebook's revenue is suppose to come in at 5% (LinkedIn is expected to continue its strong growth).
Buying companies with accelerating revenue growth is a risky game. The stocks head to the sky as their earnings rocket and the multiples investors are willing to pay for the growth rise in kind. Ultimately, the party stops and the stocks crash back to earth. Facebook seems in the middle of its first crash now, as forecasts for future revenues were revised lower pre-IPO. LinkedIn still has its crash ahead of it, yet the prospect the it still has a ways to climb before that crash keeps analysts excited. I do not consider trying to guess the top in a momentum stock a good investing strategy, and hence, would not consider it a good reason to own LinkedIn over Facebook going forward.
If you like LinkedIn, I assume you see value in social networks. Comparing Facebook's and LinkedIn's networks, we see that Facebook is priced fairly relative to LinkedIn. Moreover, although LinkedIn has multiple revenue streams, I believe this fact is reflected in Facebook's earnings multiple. Lastly, while Facebook has taken/is taking its beating from slowing revenue growth, the punishment for LinkedIn (which will come at some point) still lies ahead. For these reasons, if you like LinkedIn, you have to like Facebook.
(Note: it is still an option not to like either.)
dtlly has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and LinkedIn. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.