LinkedIn Corporation: Will it Grow Bigger and Better?

Edited by Vani Rao

Fourth-quarter estimates raises doubts over LinkedIn growth story

LinkedIn Corp. (NYSE: LNKD) is the world’s largest social networking website for professionals, with over 259 million registered users across 200 countries and territories. The company has a diversified business model, with revenue being generated from Talent Solutions, Marketing Solutions, and Premium Subscriptions product segments. LinkedIn’s unique business model enables steady revenue generation as compared to other social media websites like Facebook and Twitter, which rely mostly on advertisement revenue.

LinkedIn vs. Facebook/Twitter- Fact Sheet

Higher Growth
Source: Company Reports
Source: Company Reports
Source: Company Reports
Source: Company Reports

Facebook has the highest monthly active user (MAU) base of1,189 million in the latest quarter, followed by LinkedIn and Twitter with 259 million and 232 million, respectively. LinkedIn is adding MAUsat an annual growth rate of 38.5%, as reported inQ3 2013, as compared to Facebook’s growth rate of 18.1% and Twitter’s 38.9% for the same period. As shown in the chart below, LinkedIn has witnessed a steady rise in MAUs over the last few quarters, whereas Facebook and Twitter have seen a decline in their MAU growth over the same period.

Low Margins
Source: Company Reports
Source: Company Reports

When compared with Facebook, it is interesting to note that LinkedIn reported EBITDA margin of 23.63% as on 30 September 2013, an increased from 22.20% in the year-ago period. On the other hand, its social media rival Facebook maintained a healthy EBITDA margin of 50.10% as on 30 September 2013, a sharp increase from 43.82%in the year-ago period. It is also worth noting that LinkedIn has performed better than Twitter, which is still struggling to make profits and reported EBITDA margin of just 5.51% as on30 September 2013.

Higher Price Multiples
Source: Bloomberg
Source: Bloomberg

LinkedIn looks overpriced as compared to its peers Facebook and Twitter in terms of Price-to-Book (P/B) and Price-to-sales (P/S) multiples. Currently, LinkedIn trades at P/B multiple of 18.49 as compared to P/B multiple of 14.37 and 17.12 for Twitter and Facebook, respectively.

Q3 2013 Earnings- Another Strong Quarter

LinkedIn reported a 56% revenue growth at $393.0 million in Q3 2013, compared to $252.0 million in the year-ago period. The revenue growth has declined from 81% in Q3 2012 to 56% in the latest quarter. Its EPS increased from $0.22 to $0.31. However, the company reported GAAP losses of $3.4 million as compared to a profit $2.3 million a year ago.

Although LinkedIn reported strong revenue, the company posted GAAP losses due to a 58.7% Y/Y increase in operating expenses, which resulted in the contraction of operating margins. Moreover, the company is spending on product innovation and marketing activities. Further, LinkedIn plans to capitalize on tablet and smartphone-based applications in the near future. LinkedIn’s strategy to spend on marketing activities and develop applications for smartphones will enable it ward off stiff competition from rivals such as Twitter, Facebook, and Value Click.

Source: Company Reports
Source: Company Reports

LinkedIn’s innovation in mobile, student, and professional platformshas resulted in a whopping nine-fold rise in quarterly revenue from Q1 2010. The company’s revenue has surged from $44.7 million in Q1 2010 to $393 million in Q3 2013. The Talent Solutions product segments the largest and the fastest growing revenue segment for LinkedIn, accounting for 57% of the total revenue in Q3 2013, followed by Marketing Solutions and Premium Subscriptions with 23% and 20% share, respectively. In Q3 2013, the revenue from Talent Solutions grew 62% (Y/Y) to $224.7 million; Marketing Solutions grew 38% (Y/Y) to $88.5 million; and Premium Subscriptions grew 61% (Y/Y) to $79.8 million. The revenue growth rate across segments has fallen over the years; however, revenue growth in the Premium Subscriptions segmenthas increased over the years as shown below.

Source: Company Reports
Source: Company Reports

Global Presence

In terms of revenue by geography, the US was the major revenue generator, accounting for the largest share of62.42% share of the total revenue. It was followed by the EMEA region with 22.93%, the APAC region with 7.76%, and other Americas with 6.87% in Q3 2013. The growth rate in all geographical regions has fallen over the years as compared to the growth rate in 2011.The growth rate across geographies is between 55% and 60% in Q3 2013.

Source: Company Reports
Source: Company Reports
Source: Company Reports
Source: Company Reports

Capitalizing on the Mobile Platform

The smartphone boom has changed the way social networking sites do business. Facebook is accessed by nearly 82% of the mobile users, while LinkedIn is accessed only by 4% of the total smartphone users. This is a great opportunity for LinkedIn to enhance its market share in the mobile segment.

The company made its mobile presence in late 2011; since then, LinkedIn has seen a significant rise in mobile platform users. The company claims that the engagement on its mobile homepage has increased by 40% .Since the launch, the number of active users using its mobile platform has increased two-folds. In other words, LinkedIn has twice the number of mobile users browsing its website as compared to PC users. The mobile users using smartphones and tablets account for nearly half the sales from ad products and sponsored updates.

LinkedIn on Mobile Channels

LinkedIn Intro: LinkedIn recently launched email plugin for iOS users. The facility is available to iPhone users in their email app. The users gets the facility of knowing the designation of the email sender as available in his/hers LinkedIn profile. The application will coordinate between the iPhone email app and the LinkedIn user database to establish official connection with the email sender.

Recruiter Mobile: Around 33% of the total recruiters registered with LinkedIn use smartphones to connect to itswebsite. LinkedIn rolled out a new mobile recruiting tool with all the features of its desktop suite on the mobile and thereby facilitate easy recruiting. The new app allows recruiters to send In Mail messages to potential candidates together with taking notes during any call. The company also launched the application “Mobile Work With Us”. The application posts job openings in the company of the user on the top of their profile, enabling visitors to know about current job openings.

Apart from the mobile versions of the LinkedIn page, the company has launched a new facility for its users known as “University Page.” This gives schools the opportunity to create an online presence in the social networking arena. The new service will help schools to reach students and alumni via social networking, which is now a major means to keep in touch and communicate.

WSA on LinkedIn

LinkedIn exited the third quarter strongly beating expectations; however, the weak revenue outlook for Q4 might trigger a pullback in the short term. LinkedIn’s revenue is expected to be in the range of $415 million to $420 million, which is below analysts’ prediction of $440 million. Reacting to the Q4 forecast, the stock has lost around 7.65% of its value in the last one month.

One-month price movement for LinkedIn
Source: Bloomberg
Source: Bloomberg

The company, which made its stock market debut in May 2011 with an IPO price of $45, has been able to maximize the wealth of its shareholders, as the company’s stock has increased two-fold from 2012. We still believe that LinkedIn is a better investment option among social media stocks due to its strong business model and stable growth pattern. Going forward, we project FY 2013, FY 2014 EPS target to be $1.60 and $2.20, respectively. We suggest a Buy rating on the stock with a 2014 price target of $265.

Technical Analysis

LinkedIn stock has surged over 101.24% to date in 2013, compared to a gain of around 26.08% in the S&P 500 during the same period. The company’s shares are trading above its9-day, 20-day, and 200-day daily moving average, indicating a bullish trend going forward. Momentum indicators like William %R and RSI are suggesting a Neutral stance at current levels, whereas Momentum oscillators like MACD is trying to cross the signal line from below, suggesting a strong bullish pattern for short-term price rise. Technically,WSA sees more of an upside for the stock, with short-term price target of $240.

Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg
Source: Bloomberg

 

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