Why LinkedIn is a Good Buy
Shweta is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With over 170M current users (from ~2M users in 2004), LinkedIn (NYSE: LNKD) has become world’s largest professional network today. This offers it the opportunity to target online recruitment segments against clustered traditional recruiting players like newspapers and job portals.
LinkedIn’s business model is quite different from other web 2.0 companies. It creates an impact on various facets of business, whether it is HR, employee relations, sales, business development, or networking. This supplements it with an advantage to roll out various products in different verticals and further monetize them. Bearing in mind the challenging macro environment in Europe, I don’t undermine LinkedIn’s capability to grow in these conditions.
I see numerous topline growth drivers, over which I place my conclusion of this stock still being a safe bet. Some of them are listed below:
1. New Sales Management Products:
LinkedIn has been investing in bringing innovation and launching new products. In Oct. 12, it launched Sales Navigator which is gaining traction because of its low price subscriptions ($50 a month). This service allows sales professionals to target their potential leads by personally contacting LinkedIn member through InMail. The sweet spot of this service is that they can even contact those who are not in their network. Just to give an idea on how luring this feature can be, Sales Navigator is forecasted to bring additional $600 million in the upcoming 5 years.
Additionally, it is also planning to launch other new products for sales, which will compete directly with Salesforce. These products will provide accurate & detailed information to sales professionals and accelerate their social selling capabilities.
2. Hiring Solution Enhancement:
This has been a cash cow for LinkedIn, contributing more than 50% of total revenue. The company has been pushing its new innovative hiring solutions (like job postings, recruitment media, and Talent Pipeline) against currently available passive modes of recruitment. This has received wide acceptance from recruiters and I think this shift of recruiting style has a huge potential for LinkedIn revenue streams in the long run.
3. Self Service and Premium subscription:
LinkedIn’s premium subscription revenue growth in 2Q12 (~80% increase from 2Q11) and self-service advertising have been the top performers for its online sales. Other augmentations in “Recruiter Online” and “video ads” will keep the momentum going for its online Sales segment.
The large user base (>100M active users/month) and its profile based ad targeting gives LinkedIn an upper hand in ad pricing. With the secular shift of advertisers to online advertising, LinkedIn forecasts its addressable market to ~$25B. This will definitely boost its B2B marketing business.
5. Mobile monetization:
LinkedIn has been aggressively focusing on marketing efforts for its iPad app, which was launched in June. In order to monetize the advertising opportunity which lies in the mobile space, the company is rigorously engaged in enhancing its mobile app. I see this as another growth opportunity, given the fact how well Facebook has performed in its mobile ad segment in recent quarters.
Let’s analyze how this company is placed against its peers. LinkedIn can be compared to two sets of peers: Web 2.0 companies and traditional job search portals. The following chart summarizes the 2Q12 revenue growth and gross margins in last 12 months for LinkedIn, Facebook and Monster Worldwide.
Source: Yahoo Finance
We can clearly see that LinkedIn scores better than its peers when it comes to growth and profitability metrics. Unlike its competitor Facebook, LinkedIn is not generating a lot of revenue on display advertising. But, it offsets the same by selling premium memberships to recruiters. LinkedIn maintains a strong dominance in recruiting arena even though Facebook has launched many apps for other recruitment companies (like Monster, CareerBuilder, Glassdoor etc.). Traditional portals like Monster, on the other hand, are losing market share to LinkedIn and their businesses are dying a slow death.
Even though some analysts might find it worrying that LinkedIn’s stock has a forward PE of 84.31, I anticipate an upside to this stock due to the intrinsic potential this business model has. Notable, that LinkedIn has not missed a single consensus estimate in last 6 quarters. I would recommend this stock as a buy seeing its ability to perform in difficult macroeconomic scenario. People are desperately looking for jobs and enterprises are going for value added recruitment solutions during these times, and I see LinkedIn well placed to cash in on this opportunity.
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ShwetaDubey has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. 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.