Ignore the Moaning: LinkedIn's not Overvalued

Jane 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) is the stock that some analysts, like a Greek Chorus, love to warn investors is overvalued. The short version of that is: Beware, beware, another bubble. 

The dark cloud has hung over LinkedIn since the month after its IPO when the stock went down to $60. Big smiles among the bears.  Remember that during the IPO's first day of trading last May, the stock shot up 138% from $45 to $122.  Now around 90, in a number of analyst circles, the stock is still being grouped with other post-IPO flameouts like Groupon and Pandora Media

The bears are missing two things, at least. First of all, what LinkedIn has going for it is its unique data niche.  It captures global labor trend information in real time and interprets it in ways that are respected. That makes it a player in the emerging sphere of business called "BigData." Macro experts like McKinsey and MGI have blessed BigData as right up there with capital and labor as a factor in production.  Secondly, LinkedIn is bound to get a whole lot more social with an acquisition. That could be the once hot/now not social recruiting firm Monster, owned by Monster Worldwide (NYSE: MWW). The more social LinkedIn is the more data it gets access to, at least in the off-we-go-to-work space.  

About seven months after the LinkedIn IPO, stock commentator Kevin Kelleher used his platform in Fortune to position it, with a P/E ratio that had reached 1800, as a speculative stock, carrying too much risk. In case investors didn't believe him, he added that Morningstar’s Rick Summer agreed the stock was worth only about $45. In the middle of last month, Chief Investment Officer at Crabtree Asset Management Barry Randell observed that the stock valuation “does not reflect the fast-growing competitive threat posed by Facebook and private companies using Facebook’s platform to offer services that compete with LinkedIn.”  However, it could turn out that LinkedIn could put Facebook on the run.

Here's the data piece. Information captured by social networks is, as everyone knows, the gold of the 21st century. Privacy concerns get some slaps on the wrists and fines for the collectors.  But the practice isn't going away. Until recently, most of the attention has been focused on how data which Internet companies like Google (NASDAQ: GOOG), Facebook, Yahoo, Microsoft, and AOL mine help them sell online display ads.  Thanks to the information, they can target the right advertisers and then place their ads in what is assumed to be exactly the right spots on the web. Note that word assume. 

According to Statistica, 2011 revenue for online display ads was $12.4 billion. No one debates this is a growth business. A lot of the excitement associated with it is being created by the digital equivalent of the cola wars.  All eyes are on how Google ($1.71 billion in 2011 revenue), according to eMarketer, could steal the top spot from Facebook ($1.73 billion). But preoccupation with the category display ads might not be on the money.  For example, there's the reality, as a first-of-its-kind Comscore study found, that on the average 31% of online display ads are not seen by users.  On some sites that could hit 91%.  LinkedIn, of course, is no slouch when it comes to ad revenues.  According to eMarketer it will earn about $226 million for ads this year, a 46.1% increase from 2011. Its strategy is to get more of that from the U.S. By 2014, revenue from the U.S. could account for 60% of the pot. But what will happen when advertisers realize their clever gems might be virtually invisible?

The real and more enduring revenue story could be other ways the data could be leveraged. “BigData” refers to large sets of information that, when analyzed and applied, can become game changers. The fields in which that can happen range from delivery of healthcare to labor market planning and assigning of educational/training resources.  In their research McKinsey and MGI concluded this “Big Data” factor “will become a key basis of competition, underpinning new waves of productivity growth, innovation, and consumer surplus." 

Evidence of this popped up just this past weekend with an article in the influential The Economist.  That covered the request by the White House Council of Economic Advisers to LinkedIn to report on which job categories were growing and which vanishing. LinkedIn has the capability to track that in real time and quickly bundle it into packages which deliver meaning. Eventually, this could render many other types of research such as surveys, which take weeks to administer and interpret, obsolete. Listen up struggling enterprises like J.C. Penney, little changes could have big impacts. According to McKinsey and MGI, “A retailer using big data to the full has the potential to increase its operating margin by more than 60 percent.”

Now the part about getting more social through acquisition. LinkedIn could deepen and widen its reach in the career market if it acquires the undervalued Monster. On March 1, the parent company Monster Worldwide announced hiring Stone Key Partners to explore strategic alternatives.  About seven days later Motley Fool analyst Rick Aristotle Munarriz listed reasons the acquisition would make sense for LinkedIn.  One is Monster’s revenue.  Last year it was $980 million, more than LinkedIn’s $872 million.  P/E watchers won’t have LinkedIn to kick around any more.  Secondly, on the Monster platform it would be easier to build the kind of professional communities that the more successful Dice Holdings (NYSE: DHX) does so well. Within the safety of the community, members tend to release more information. And, of course, Monster, valued at about $1 billion, would be a relatively cheap buy. If the acquisition does go through, count on seeing this aggregate in high-profile promotional forums such as the Super Bowl, which will likely rebrand both LinkedIn and Monster. Should LinkedIn not acquire Monster, it is bound to find another undervalued player to join with to boost revenue and become more social. The social space has a high underachievement rate.

Given the combination of escalating confidence in the recovery and residual angst from the downturn, employers, job hunters, labor experts, and all sorts of think tanks will likely flock to LinkedIn for its perspective, services, and products.  One major item on the menu will be selling data, with a serving on the side of useful interpretation.


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