This Internet IPO is Here to Stay

Gaurav 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) has braved the cold winds of IPO disasters very well. Meanwhile, peers like Zynga, GroupOn (NASDAQ: GRPN), and Facebook (NASDAQ: FB) all felt its withering effects. So why was LinkedIn the only recent internet company to IPO that has not taken the wrath of investors? Here is a SWOT analysis to answer that very question.

Strengths:

1.   Leading professional social network with over 185 million registered users- LinkedIn is the world’s largest professional network and the company has been going strongly year by year to enhance this position. The increasing popularity of the platform can be seen in the numbers reported in the recent earnings release. As per its last earnings release, the company has added 13 million users over the previous quarter. The following chart depicts the LinkedIn’s strong user growth over the last few years.

Source: Company Reports

2. Large addressable markets – Here is a big one; LinkedIn is operating to be the market leader of the $27 billion talent acquisition market and the $25 billion online advertising market. It is these target markets that justify the high valuations of LinkedIn relative to its other internet peers like Facebook and GroupOn.

3. Barriers to entry due to professional focus and network effects- This is the major reason why I am highly optimistic about LinkedIn going forward. LinkedIn certainly is a better play compared to GroupOn and Facebook. While GroupOn is a good idea on paper, they are not able to capture consumer spending, and the consumer retention rate has been really low. With recent speculations going around GroupOn’s acquisition by Google (NASDAQ: GOOG), the stock has been gaining some lost firepower, but I believe that in the long run it would be better to bet on Google as the search giant tries to leverage GroupOn’s deal-based platform.

As for Facebook, it would not be too hard for users to change their preference to another social site. Google has been working towards replacing Facebook from its perch, with Google Plus emerging as an answer to many searches on Google. What I don’t like about Facebook is its weakness towards market currents and trends. Small news of an update or a new version of Google Plus can affect the stock in a big, negative way.

However, the main reason why LinkedIn succeeds while others fail is due to the scope of customer retention and the lifetime value per user. It would be harder for a user to shift from a professional network than it would be from a social network or, say, a deal site.

Weaknesses:

1. Low User Engagement: While this is to be expected, LinkedIn has been working towards eliminating this issue as it works to create a more social platform-based look to its portal

2. Sensitivity to macroeconomic changes: The hiring business could take a hit in the case of a recession or slow macroeconomic conditions.

Opportunities:

1. Increasing Advertising for Enterprise accounts: LinkedIn currently has penetration of more than 200,000 addressable enterprise accounts. This offers a huge advertising opportunity to LinkedIn.

2. International Expansion Opportunities: LinkedIn still has most of its revenues coming from the US. An increased marketing spend internationally could see new markets working in tandem for LinkedIn.

Threats:

1. Risk of a competitor launching a better product: While the probability of such a scenario is low, it still remains nonetheless.

2. R&D: LinkedIn’s heavy investment in the R&D division may not payoff.

The Bottom Line:

The internet marketplace seems largely segregated to me and is here to crash. This is quite apparent from the kind of crashes GroupOn and Zynga have seen, as they both have dropped more than 70% YTD, along with Facebook, which has only just started regaining its price but still is down 27% from its IPO price. However, LinkedIn is a pure play in the job industry, with its highly differentiated offerings in both corporate recruiting and online ad sectors. I believe that LinkedIn can sustain significant user growth given the size of its addressable market and the uniqueness of its data and product offering, and hence I rate it as a buy.


gauravguru has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook, Google, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook, Google, 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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