This Company Could Continue to Outperform

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

Job searching is an evergreen industry and LinkedIn (NYSE: LNKD) has captured the market tactfully. The company has a market cap in excess of $19 billion, which is surreal since it can basically operate from one building alone. Though its towering valuations have raised some brows, I believe that earnings multiples tell only half of the story.

Growth or not?

LinkedIn has a history of unrealistic P/E ratios, yet the company has reported impressive growth. While its P/E ratio has declined from 1,700x (yes 1,700x, not 1,700%) to 926x (again, not a typo), its cash flow from operations has risen by nearly 93% since its 2011 IPO. Going by the track record of ridiculously high valuations, LinkedIn shouldn't have reported stellar growth in the first place. But it did!

Due to LinkedIn’s tremendous growth opportunities and relatively lower risk of sudden obsolescence, the market is happy to pay the hefty premium. As of now, LinkedIn has over 200 million professionals in its network, and its management expects to connect to as many as 500 million professionals. I think that the number is realistic especially since India and China alone are resided by over 2.5 billion people.

To continue the growth momentum, LinkedIn recently reinvented its job search engine. It added loads of new searching tools, which are claimed to pinpoint potential job candidates. If the claims hold ground, LinkedIn could soon become the "chillout" spot for most recruiters around the globe.

It’s not really a threat!

Unlike Facebook (NASDAQ: FB), LinkedIn is isolated from dropping advertising rates. LinkedIn derives its revenue by providing premium access to its users, while Facebook makes use of conventional advertising techniques. Although the two are not direct competitors, Facebook has been indirectly giving competition to the professional social network.

Branchout and Glassdoor, which work as Facebook apps, are gradually catching up. Their business model is to facilitate professional networking within the Facebook application programming interface, or API.

I think this is a bit ambitious, and mixing professional and personal lives, just to save the hassle of logging into another network, seems like a bad idea. At best, these start-ups can boost Facebook’s advertising revenue over the intermediate term, but I don’t see Branchout and Glassdoor as serious threats to LinkedIn.

Although Monster Worldwide (NYSE: MWW) is LinkedIn’s main competitor, the latter didn't have to struggle to outperform its peer. Monster Worldwide functions as a job facilitator, allowing employees and recruiters to connect with each other.

But LinkedIn operates with nearly all the capabilities of Monster Worldwide, which not only facilitates job searching but also allows professional networking. It's due to this reason that over the last two years, shares of LinkedIn have risen by 87% while shares of Monster Worldwide have depreciated by 66%.

Wrapping it up

On taking a look at the metrics, Monster Worldwide looks like a dream stock. It appears to be deeply undervalued, with little debt and a massive 54% gross margin. But its shares have plunged by nearly 31% over the last year, and the management is not able to cease the decline.

<table> <thead> <tr><th> <p>Company</p> </th><th> <p>Debt/Equity</p> </th><th> <p>PEG</p> </th><th> <p>Gross Margins</p> </th><th> <p>5 yr. EPS growth est</p> </th></tr> </thead> <tbody> <tr> <td> <p>Monster Worldwide</p> </td> <td> <p>19%</p> </td> <td> <p>0.8x</p> </td> <td> <p>54.1%</p> </td> <td> <p>13%</p> </td> </tr> <tr> <td> <p>LinkedIn</p> </td> <td> <p>0%</p> </td> <td> <p>15.5x</p> </td> <td> <p>87.1%</p> </td> <td> <p>60.1%</p> </td> </tr> </tbody> </table>

Despite the lofty valuations of LinkedIn, analysts expect its annual EPS to grow at a staggering 60% for the next five years. This means, an investment made this year could multiply by eight times in less than five years. But obviously, the risks presented by volatility and flash-crashes of dot-com companies will be there. That said, I think LinkedIn is a great company and investors should ride the trend, until the end.

Piyush Arora has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook 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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