Good but Not Great

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

Professional networking site, LinkedIn (NYSE: LNKD) is a good company with rapidly growing revenues, partially, due to small size, and a steadily growing user base of 187 million members, but it falls short of being a great company. It doesn't have a wide moat, as the users on the site are not 'sticky' because most of the connections on the site for members are mere acquaintances. In addition, LinkedIn is often perceived as 'boring' by many users, this represents a big hurdle for the company. The impact of a 'network effect' on user engagement is rather minimal, as friends and family's engagement on the site is not high. On the other hand, the 'stickiness' and durable competitive advantage of social media rival, Facebook (NASDAQ: FB) is significantly higher.

Value of Eye-Balls

The life blood of social media platforms is nothing but user engagement. Once users actively engage and spend time on the platform, monetization usually follows. Other prominent social media sites of yester-years such as MySpace, Hi5, etc., had declining levels of user engagement, however, members didn't close out their accounts. While it may seem the company is stable, due to overall user accounts being flat, the reality was markedly different. 

One might argue, but revenues are going uphill? Well, that is correct, but advertisers and recruiters will start to jump ship rapidly if users don't spend time on the website. Advertisers won't get the desired number of eyeballs, and recruiters won't be able to hire the best people for their companies. 

Engagement on Desktop Is on the Wane

Starting from Q2 F'12, page views excluding mobile have started going downhill. According to comScore, page views came in at 9.3 billion for Q2 and it trickled down to 8.9 billion views at the end of Q3. A look at the page view per member also shows the same trend of detriorating engagement levels among members. 

Exhibit 1: Page Views per Member (ex-Mobile)

 Source: Company Data, Estimates

However, all is not lost for LinkedIn, the company has introduced several new products such as a new Home page and Profile page; it also launched Endorsements and the ability to track Thought Leaders on its platform. All these innovations will likely increase and stimulate user engagement going forward.

Mobile Monetization Hasn't Taken Off 

Mobile is growing strongly for LinkedIn and in Q3, roughly 25% of all unique visitors came through mobile apps, which is up from 13% last year. However, total page views on smartphones and tablets are not very high like desktop, due to smaller screen space. Also, the utility of using LinkedIn on the go is rather limited; users will conduct Google Searches, look up deals on Groupon, read reviews on Yelp, catch up with friends on Facebook but are unlikely to navigate through LinkedIn on the go. 

However, the company continues to introduce newer features for Android and iOS users. LinkedIn recently started rolling out customized products lines for mobile in all  business segments, i.e. talent, marketing and subscription products. And also, job postings are being portrayed on mobile, and LinkedIn soon expects to roll out display ads on the iPad app. However, monetization on mobile hasn’t ticked off yet.

Talent Solutions Likely to Remain the Biggest EPS Driver

LinkedIn has been delivering stellar growth in all business lines in the past few quarters, but mainly due to its small size. Talent Solutions rung in $138 million in revenue, accoutning for 55% of the total, and is up 95% Y/Y. Talent Solutions will likely be the biggest EPS driver, as more and more companies utilize LinkedIn to engage, brand and source talent and shy away from recruitment portals like Monster (NYSE: MWW), who has been feeling the impact of LinkedIn for a while now. Its revenues and profits are down substantially Y/Y, and its revenues are declining Q/Q as well. Monster's share price is near the 52 week lows, and the company is on the look out for strategic buyers. Over time, LinkedIn has the ability to gain more momentum from corporate recruiters, and eat away more market share. 

In addition to recruitment dollars, LinkedIn's revenues from marketing solutions are doing well, and is up 60% Y/Y to $64 million, as more and more brand advertisers test the depth of LinkedIn's ads. The advertisers are willing to pay more as CPMs have notched up, which is great news. However, the online ad market is a fiercely competitive one, and it would be very surprising to see LinkedIn get a big chunk of its total revenues from Marketing Solutions alone, as advertisers have a lot of options, and many competing firms such as Facebook, Google (NASDAQ: GOOG), etc. offer very high end user targeting capabilities. LinkedIn also offers premium subscriptions which brought in $50 million in revenue at the end of Q3, up 74% Y/Y.  The main customers for the Premium Subscriptions standpoint, are mainly salespeople and business development professionals, and can gain more traction in the long term, but is unlikely to be a sizable portion of total revenues. 

Competitive Advantage Is Not Durable Over the Long Haul

Facebook, along with other social media newbies such as Pinterest and Twitter are all perceived as cool and where a person can hold on to their identity, and connect with close friends and family. Google on the other hand, bundled a number of services with Google+. Also, users have to sign in to Google+ to access other Google services such as YouTube, and Gmail. While a lot of users where unhappy, Google+ did manage to get a lot of attention for its Hangouts functionality, which allows multi-user video chatting. 

Facebook has managed to collect data and information of users like no other social media platform ever. It would be hard to imagine a user on FB who has, for example, 300+ photos and 500+ friends gathered from years of usage, to copy all that information and post to a competing network like LinkedIn, Google+, Twitter etc. and this is a huge and compelling advantage of Facebook. LinkedIn loses out because of the professional nature of the site, which often scares members away from inputting too much personal information. This may not be a big problem in the near term, but it could provide substantial headwinds for the company in the long run.  

 


ishfaque has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google, and LinkedIn. The Motley Fool owns shares of 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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