Is LinkedIn a Smoke and Mirrors Illusion?
Erin is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
LinkedIn (NYSE: LNKD) may be one of the most overrated and dangerous website investments, and investors are cautioned to take a deeper look, before being enticed by the exciting numbers posted recently. While others are championing the increased revenue of the company, I question the value of the company, and fear it as an investment.
LinkedIn is a professional networking site - Facebook without the games, pictures, and friends, and it is okay for your boss to catch you using it. The site features a network built of a user's “direct connections,” and in a “who is connected to who” sort of way, displays second and third degree connections. The site lists job openings and a job application program for users. Employers can use search terms to find potential employees based on keywords in user's descriptions and profiles. Actually not only employers, but anyone with a user account can search terms and find other users both in and out of their personal networks. Job seekers can research other companies, hiring managers, past college friends, or new co-workers as well. Another feature is the professional networking groups, started by the registered users, where conversations on specific topics, typically of a professional nature, or around an event, can take place.
On the surface the site sounds like a great business networking tool, especially with its 107 million unique monthly visitors from over 200 countries worldwide. However, the site is horribly underused. Many users join the site once at the invitation of a friend, complete a profile, and then never return to take advantage of the site's further services. This is a point that will be discussed further later.
One significant problem for the site is that for users to truly take advantage of all the services, they must pay for a membership. Considering all of the functionality on the site can also be found elsewhere (Facebook for social interactions, professional societies, alumni groups, etc), there is little incentive, except convenience, or desperation to contact someone, to pay the membership costs.
By the financial numbers, LinkedIn comes with high marks and respect though. The company was founded by seasoned and experienced start-up professionals from Yahoo!, PayPal, and Socialnet.com, in 2003. In 2010, Silicon Valley Insider ranked the company No. 10 on its Top 100 list of most valuable start-ups. LinkedIn filed for its IPO in January 2011, and went public in May 19, 2011, in an historic debut. It was the first IPO of a major social media site, and was valued at $8.8 billion in those starting days, rising over 100%. At launch, the company debuted at $101.85 and closed that day at $93.09. Now a few days shy of one year later, the company is trading at $119. The low for the year was $55.98, the high $122.70.
In comparison, Yahoo! Inc. rose 154 percent on its first trading day in 1996, and Google rose 18 percent at its IPO in 2004.
The company released its 2012 first quarter earnings May 3. Revenue for the first quarter was $188.5 million, an increase of 101% compared to $93.9 million the year previous. Net income for the first quarter was $5.0 million, compared to $2.1 million for Q1 2011.
So where does LinkedIn make its money? The company earns income in three distinct areas. The first is “hiring solutions,” which totaled $102.6 million, an increase of 121% over the year previous. Second is “marketing solutions,” which includes text and display ads on the site. Marketing solutions revenue brought in $48 million, an increase of 73% over 2011 same period. Last is “premium subscriptions,” or paid memberships, which accounts for 20% of revenue.
The company is definitely profiting from the upswing in the economy. As more companies continue to improve individual earnings, they begin to hire more new employees, and to do that they place more job postings. Hence, LinkedIn profits as “hiring solutions” brings in 54% of total revenue for the company.
But while other analysts and investors are singing LinkedIn's praises, after years of working in social media and online marketing, and consulting for some of the biggest American corporations on the subject, I call malarkey.
According to comScore, unique visitors to the site averaged 102.5 million in the first quarter of 2012. In March 2012, LinkedIn ranked as the 31st most-visited website worldwide, with 9.4 billion page views, according to comScore. But has the company grown in membership in the right ways?
A large number of registered users is not the same as daily users. On a worldwide scale, the site saw growth of 65 percent, from 48 million users in March 2010 to 79 million as of March 2011. However, that is in “users.” This time the new number has been reported as 107 million unique monthly visitors. The company did not publish numbers differentiating between the number of user accounts and monthly visitors. This number probably has been figured out by someone, somewhere. However, the fact that LinkedIn itself does not publish it openly, is cause for concern.
Social media and online marketing experts know that there is a significant and important difference between “registered users,” “monthly unique visitors,” and “active users.” The first tends to be a very inflated number across most social networks. Many users come, register, and then never return to the site. The second number, monthly unique visitors, does not have to include registered users. It can also include viewers who visit a site and determine it isn't for them, and leave. It can also include the same user over and over from a different IP (for instance, work computer, home computer, mobile device). In a letter to shareholders LinkedIn states, “We added 55 million new members, growing our member base by 60% to 145 million [in 2011].” Of the 55 million new members, how many returned multiple times? How many continue to use the site regularly? How many users take advantage of the all of the site's offerings? Likewise, of the businesses paying for job postings, how many found the postings to be useful? How many companies felt they got the right “bang for the buck” off of the postings? How many companies returned to post a second time? In most cases, the most important number to a social media or online marketing analyst, is the active users. When a user returns to a site repeatedly, a real profile can be formed and analyzed (and not just gleaned and created from the information provided at registration). It is important to marketing analysts to see that there is a large number of active users, and that they are not just "preaching to the choir" over and over again. There needs to be real growth and turnover in active users for real value to be found in ad placement. If marketing analysts don't see the value in a site, they don't place ads. If they don't place ads, LinkedIn doesn't make money.
Without clear and straightforward answers to these specific questions, LinkedIn m a smoke and mirrors illusion. Before investing, ask yourself how often you are active on the site? Are you taking advantage of all it has to offer? Or do the numbers surprise you because you can't recall the last time you used the site?
LinkedIn has potential to truly be a great resource, and for that reason, it should not be ignored. From strictly a mathematical point of view, ignoring the more in-depth social aspects of the site, it appears to be a no-brainer, and every investor should want a share. But from the point of view of a social media expert, I must stop and wonder how long until the bubble pops? How long until everyone stops and realizes that the site offers great value, but is ignored by users? Daily page views sound good to advertisers, but if advertisers are not getting the sales and ROI from the ad, they will pull out. If LinkedIn doesn't start to find a way to better engage its registered users, rather than just recruit new users, adding quality and value, the advertisers will begin to disappear, and along with them, the company's revenue source.
You can create the greatest widget in the world, and people can line up around the block for miles to come see it, and maybe even buy it. But if no one uses it, is it worth it?
The company is doing quite well overall, even if failing to appeal to the average American employee. However, that may change soon, as the company has acquired several new services, which may make the site more useful to its users.This week the company announced the purchase of SlideShare for $118.75 million. SlideShare has been described as the “YouTube for slideshows.” Implementation of the tools available through the new acquisition could make LinkedIn a home or hub for online presentations among a network. In February 2012, LinkedIn announced acquisition of Rapportive, a start-up that created a browser plug-in that takes contact information from social networks such as Twitter and Facebook, and places them into Google's Gmail. LinkedIn has not stated yet how they will use Rapportive's technology and talent. But potentially it sounds like LinkedIn could become some sort of address book, or better developed contact database. (Contact information is currently very limited and private on the site, unless a user chooses to disclose it.) LinkedIn also acquired IndexThank, a real-time search technology in October 2011.
From an investing standpoint, I see enticing and intriguing numbers, that would encourage many to invest. But from the standpoint of a social media marketing analyst, I question the value of LinkedIn. I see the potential in the services offered. I know that it could be a great resource for users. But I also see a lack of continued engagement, and therefore, inflated numbers. And until I see higher engagement and involvement by users, and an effort by the company to retain and engage users, I cannot get behind LinkedIn.
ErinAnnie has no positions in the stocks mentioned above. Her professional background includes ten years in marketing, with five years specializing in social media consulting. The Motley Fool owns shares of Google, LinkedIn, and Yahoo!. Motley Fool newsletter services recommend Google, LinkedIn, and Yahoo!. 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.