LinkedIn: Heed the Woes of Netflix
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
If you happened to catch previous articles on LinkedIn (NYSE: LNKD) it’s likely you were one of the many that lined up to lament the outlandish notion that LinkedIn was woefully overvalued. At a bazillion times both past and future earnings, not to mention a market cap of over $12 billion for a company that will generate a total of $880 to $900 million in revenues in 2012 - it's not hard to see how I might think that way. Truth be told, there remains an inkling of doubt – or maybe it’s nothing more than a '90s flashback and the realization that here we are 20 years later and about the only internet company still standing is Amazon (yeah I know there are one or two others, but you get the point).
The general response to the notion that LinkedIn investors had gone over the edge was “this is an early growth stage company (insert BLANK here)! Traditional fundamentals don’t apply, EVERYONE knows that.” No arguing with that irrefutable logic – at least to an extent.
So here we stand today – LinkedIn shareholders have enjoyed a nearly 90% run-up so far this year, the company continues to ratchet up revenue and earnings estimates daily it seems and they’re continuing to build up multiple sources of revenue. Never one to rest on my laurels (which would require having any to begin with) its clear LinkedIn and CEO Jeff Weiner are onto something here.
Most impressive – even more so than the revenue gains at this point – is the manner in which the company is diversifying its revenue streams. The Hiring Solutions segment – a direct competitor to industry leader Monster Worldwide (NYSE: MWW) – continues to lead the way, generating over $100 million in revenue the past quarter. Better still, with a slowly improving economic and jobs environment the timing couldn’t be better. Not to mention the Talent Pipeline experiment in Q1 opening up to the rest of the 2 million companies already onboard with LinkedIn – that should be interesting to watch going forward.
The Marketing Solutions and Premium Subscriptions divisions – while growing significantly – both represented slightly less of the company’s overall revenues. Nothing frightening about that necessarily, but it is worth noting and keeping an eye on.
A Word of Caution
Okay, so now that I have – for the record – started the slow and arduous process of coming around to the LinkedIn camp, a word of caution – Netflix (NASDAQ: NFLX). It was four or five months ago when I first wrote regarding what would happen when – not if – competition started heating up in the streaming digital video marketplace. Since that time several big boys have entered the fray and the result has been nothing short of painful for Netflix shareholders. In the last three months the stock is down over 40% and there’s no end in sight – for the immediate future anyway.
The lesson? The same cast of characters are on the horizon and will need to be reckoned with if LinkedIn is to continue its outstanding growth. Google’s (NASDAQ: GOOG) social networking site grew to 90 million users – twice that of LinkedIn “competitor” Viadeo – in about 15 minutes. The shift from social to business networking won’t take much for Google and the soon-to-be-public Facebook, particularly with their partnership with Microsoft’s Bing. And these big boys are hardly alone – you can throw AOL into the potential competitor mix as well.
What it all boils down to is this – LinkedIn is on the right track with diversifying their revenue sources, a focus on international expansion that already generates a third of the company’s sales, and strategic growth through acquisitions like the recently announced SlideShare. But don’t hit the snooze button investors, you don't want to wake up in the same bed as Netflix shareholders.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article. The Motley Fool owns shares of Google and LinkedIn. Motley Fool newsletter services recommend Google, LinkedIn, and Netflix. 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.