Stay LinkedIn for the Long Term
Bobby is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
To most admirers of LinkedIn (NYSE: LNKD), the biggest question is -- is the premier jobs hub priced to perfection?. With consensus estimates pointing to 63 cents earnings for 2012 and $1.31 for 2013, LinkedIn has a whopping forward earning multiple of 79! And with the way the market has punished social network high fliers Facebook (NASDAQ: FB), Zynga and Groupon, surely LinkedIn is a likely candidate for a hammering with the slightest miss?
Bring it on! I would be happy to buy LinkedIn lower, I believe that its pedigree, its business acumen and leadership position will easily allow it to withstand small and large price drops over the next five to ten years.
These are the reasons
I believe the online recruitment market is consolidating into an oligopoly with social networking websites gaining prominence and job boards consolidating towards leaders like CareerBuilder.com. With an estimated market size of $5.3 billion this market is dominated by the likes of LinkedIn and Monster Worldwide (NYSE: MWW), which have revenues of around $1 billion each, and Careerbuilder and Facebook rounding it out as the big four.
With consolidation, the bigger players usually get stronger and are at least able to maintain prices, if not increase them. Within the industry, even established players have coalesced around the leaders – witness that the NY Times website, once one of New York’s largest job sources, has outsourced its business to Monster.
LinkedIn has made some Google and Amazon like moves (as in being ubiquitous or the default choice) by bagging the right to have its Social Connector be a part of every Microsoft office sold with Windows 8.
LinkedIn also has the moat being the only focused interactive player – Facebook tends to be all things to all people. And as for Monster and CareerBuilder, how often do you interact on those sites for ideas, leads and tips?
I do believe that the job boards will survive and CareerBuilder will survive on its strengths, experience and strong parents, Gannet and McClatchy. Besides, social networks cannot complete or provide all the listings, nor can they replicate the experience and reach of being so many years in the business.
Why is net income only 1.7% of sales in the first half of 2012?
Net income got punished as LinkedIn continued to invest in boots on the ground; adding employees was the primary reason for Selling, General and Administrative expenses shooting up to 31% of sales from 28% in Q2-2012. Spending on research and development was 22% of sales, but I think it is the right and better way to grow. Boots on the ground leads to higher value added sales and better technology makes it cheaper for LinkedIn to acquire more users for its plain vanilla services.
Importantly, LinkedIn has grown in a difficult environment. At 8.2% unemployment, job growth has been dismal and if this improves LinkedIn will definitely benefit. To get a better margin of safety, I would spread my purchases over a few months averaging cost down at declines.
poach has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and LinkedIn. Motley Fool newsletter services recommend 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. If you have questions about this post or the Fool’s blog network, click here for information.