What if They Are Right About LinkedIn?

By Matthew DiLallo - April 30, 2012 | Tickers: GCI, GOOG, LNKD, MWW, MNI | 0 Comments

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Facebook gets a lot of hype with its IPO rumored to give it a market cap of over $100 billion and its hundreds of millions of account holders but in the business world I hear more about LinkedIn (NYSE: LNKD) than any other social media tool or website out there today.  Not everything I hear is good, as on one side of the argument you have those that will say LinkedIn is the most expensive public company out there or it’s just a fad.  While others think this transformational company is like buying some of the great .com stocks in their infancy thanks to its powerful network and profit potential. The questions that I want answered is who will be right about LinkedIn and what does that mean for investors?

There are times that a company sneaks into our daily lives and we don’t realize how many other businesses it has disrupted because we simply forgot they existed.  This is where I think LinkedIn is starting to find itself and I don’t think many of us even realize it.  For me my eyes were opened when I finally accepted one of the dozens of invitations for a connection and actually finished building the profile I started years ago.  You see, there are few words in the English language that I detest more than the word networking.  Blame it on the day job but just the thought of having to go out of my comfort zone and meet people I probably don’t want to talk to about things I probably won’t really care about just doesn’t excite me.  I won’t even mention the fact that you typically either have to get up early or stay late just to find out that the person you really wanted to talk to didn’t even show up.  LinkedIn, however, cuts through all that mess and with one simple email you are asking someone you know to have someone they know call you about something that is very mutually beneficial.  The explosion of this type of social networking has led to over a hundred million of us uploading our resume and experience in hope that someone we know will be contacting up about an opportunity we never knew existed.

This data is collected and analyzed by LinkedIn and packaged in the form of some powerful tools.  These tools are opening doors that are completely disrupting the human resources industry.  For years in order to find a job you had to open up your local paper and scoured through the classified section and then make a few hundred phone calls and mail out a few dozen resumes.  Then came the internet and powerful tools such as CareerBuilder which is now jointly owned by privately held Tribune and the publically traded McClatchy Company (NYSE: MNI) and Gannett (NYSE: GCI) and Monster Worldwide (NYSE: MWW).  These tools are now also being disrupted into obsolescence, this time by LinkedIn as human resources professionals are paying for the premium tools that LinkedIn provides to not only look at active job seekers but the passive seekers that they never would knew existed until LinkedIn brought them right to their computer screen with a few clicks of the mouse. 

For the most part Monster and CareerBuilder have just become a place where job seekers would go to dump their resume.  Monster and CareerBuilder would then blast out these resume’s to recruiters in such force that one HR professional said to me just the other day that Monster is just that, a monster to deal with.  LinkedIn with its massive data network is giving these HR professionals the ability to see real world work experience, connections, recommendations and more to see a truer picture of both active and passive candidates giving them the power to do their jobs more efficiently than ever before.  This data is giving LinkedIn an advantage over their peers like none other and should allow them to dominate their niche in a way that other social network disruptors like Facebook and Google + (NASDAQ: GOOG) won't because they cater to too broad of an audience which has a watered down effect. 

While that’s all find and dandy, the thing that should excite investors the most is the huge addressable market.  In 2011 LinkedIn had just over $500 million dollars in revenue and generated about $99 million in EBITDA and earnings of about $12 million.  When you compare this to their $13+ billion dollar market cap you can see why it’s been called both expensive and overvalued.   Yet, when you look at the value its creating every day for its users, clients and advertisers you start to see how it can continue to disrupt.  For example, about half of their revenue comes from the hiring solutions side and that addressable market is $27 billion dollars, so given that they currently control less than one percent of this very fragmented market they really are just scratching the surface.   While they are likely never going to replace staffing firms, they can continue to provide them more tools and more candidates and thereby generate more revenue and profits.

LinkedIn might be expensive, but it’s far from being a fad, instead it’s disrupting some industries into oblivion.  There will be many volatile growing pains along the way but for the investor with a long term view, LinkedIn has the potential to be one of the best web 2.0 investments available.  They’ve built a massively disruptive business of collecting volumes of employment data and business connections which is giving them a tremendous competitive advantage over their peers both in social networking and in the career services industries.  LinkedIn is not for the faint of heart, but I think it should produce market beating returns as it grows through its current valuation by continuing its disruptive ways. 

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