LinkedIn

LinkedIn (LNKD) is a professional networking website, providing services in more than 20 languages. The website allows its users to maintain a list of contact details of their connections. It is a very good platform to exchange the professional details amongst each other. Employers can list jobs and search for potential candidates and job seekers can review the work profile and evaluate. LinkedIn earns its revenue through fees and various advertising programs on its website. The company has a premium membership program, providing an advantage to its premium members in return for a fee. LinkedIn launched LinkedIn DirectAds as a form of sponsored advertising in 2008. Its sponsored updates ad service allow companies to pay a fee to sponsor their content, which was introduced in 2013. The company is also very user friendly, as it launched its mobile version and a special service called “Intro” for iPhone users. Given the company’s uniqueness, growth performance and user friendly approach, it is a definite buy in my books.

What we like about the company

One of its kind – LinkedIn is an extremely focused network, laying emphasis on the professional development of an individual. It is like a platform where both the employer and employee meet and they can evaluate one another on the basis of their public profiles. In February, LinkedIn updated its Who’s Viewed My Profile, where people come to know about the details of who viewed their profile, thereby building their professional brand. It is extremely user friendly and available in many languages now. The website allows for long form publishing to its members. One can view a complete profile of the professional with pictures.

Popular Globally – Currently LinkedIn has around 300 million members in over 200 countries worldwide, 40% of which is outside of the US. The company launched a beta site in Simplified Chinese in the first quarter, to expand its presence in China. This site aims to increase the member base from 4 million English language members to 140 million professionals and students in China. There was a good progress in the EMEA and APAC regions. The Chinese member size grew from 4 million in February 2014 to 6 million in September 2014. China is proving to be an important and emerging market for LinkedIn. During Q3, ~75% of the new members came from outside US.

Mobile friendly – LinkedIn is completely mobile friendly with apps on the leading operating systems. It has a Recruiter on Android and also released an enhanced version of Recruiter for iPhone. The company derives a major chunk of its revenue from mobile users. Around 43% of the monthly unique visitors in Q1 2014 were mobile users. Mobile continues to be the fastest growing channel for member engagement, hence the company launched its first standalone mobile app called LinkedIn Job Search. This app is now available for free in the iTunes store and also running in the USA. It is also expected to reach the other regions soon. Traffic from mobile now accounts for 47% of the total traffic to LinkedIn.

Business and Revenues – LinkedIn’s revenue grew by 45% to $568 million for Q3 2014 beating market’s expectations of $558 million. Premium Subscriptions grew 43% to $114 million contributing 20% of revenue.

The company has three major line of business: Talent Solutions, Marketing Solutions and Premium Subscriptions products, representing the way people hire, market and sell respectively. In Q3 2014, Talent Solutions business continued to be the largest and fastest growing revenue line. It is expected to contribute to ~61% of the total revenues by 2014 end. There was a revenue growth of 45%, 45%, 43% respectively on a yearly basis in the three segments. The overall revenues grew 45% to $568 million, as compared to $393 million reported in Q3 2013.

Revenues from USA amounted to $343 million, from EMEA region to $139.7 million and from Asia-Pac region to $48.9 million. The cumulative members grew 28% to 332 million. Unique member visits increased to 90 million per month and member pageviews grew 28% in Q3 2014.

About three-fourth of the new members were from outside USA.

The reported EPS was $0.52 as against analyst estimate of $0.47 and Q3 2013’ EPS of $0.39.

Acquisitions & New Strategies

LinkedIn has been inventing new strategies to retain members and to attract new members. It recently started publishing posts from members to increase member engagement on the website. They have achieved 40,000 posts getting published per week. The company also launched new tools to help high school and college students. The students will now get a chance to start planning their career using their rankings, other analytical tools and available data in the website.

The company recently made acquisitions to grow its business further. Two of them are:

LinkedIn announced in July 2014 that it shall acquire Bizo which deals in business audience marketing. Bizo will provide a service that will consolidate the listings from across the globe. This acquisition has helped LinkedIn deliver more than two million job listings during the quarter.

LinkedIn acquired Newsle in July 2014. Newsle provides professional insights by displaying newsfeed about people in a person’s professional as well as social network.

These two acquisitions helped LinkedIn integrate the features from both these organizations for the betterment of the professional network on LinkedIn.

Outlook

The Q4 revenues should range between $600-$605 million and EPS of $0.49. The company gave a soft outlook of $2.17-$2.18 billion for revenues and an EPS of $1.89 for the year ending 2014.

Risks

Competition – LinkedIn is a social website which faces extreme competition. Though the website is popular, it faces the threat of competition from other social websites and also the new ones. Today’s digital space is fast expanding, the once popular websites like Orkut are no more used. So the company needs to be on its foot all the time and continue evolving.

Insider Trading – Insiders sold about 40,000 shares for $9.5 million between 3^rd and 4^th November, 92% of which were dumped by CEO Jeff Weiner. There were more insider selling in the months of September and October. Insider trading causes concern amongst shareholders and investors.

Issuance of Convertible Debt – LinkedIn recently announced $1.15 billion convertible note offering. These notes are unsecured and can be converted into cash or common shares of LinkedIn. Generally these kinds of notes are not issued by healthy companies. They usually resort to secured debt or an equity issue.

Competition Analysis

LinkedIn is a popular professional website, Facebook (FB) and Twitter (TWTR) are the other top social networking websites. However LinkedIn is a professional networking website, which is gaining popularity worldwide. LNKD has not done as well as Facebook, but better than Twitter over the last one year. But when we compare the last five years’ performance of the companies, LNKD has out beaten the performance of the other two.

Stock Performance & Valuation

LinkedIn seems to be expensive when compared to its peers like FB and TWTR. However the stock has seen some price correction since March 2014. LNKD stock is currently trading at ~$215, which is very near to its 52 week high of $239.17. The company has a market capitalization of $26.7 billion with a P/B of 8.9x and P/S of 13.1x.

LNKD performed better than Twitter over the last one year.

Conclusion

LinkedIn is unique in offering specialized services to professionals. The company though faces competition from the other internet companies, but not on a one-on-one basis. LinkedIn is trying new strategies for improving the user experience in a way that it further helps them in relevant job searching. It is expanding and adding new users not only on a professional level but also on the student level. The company is trying to be more user friendly across China. The balance sheet remains strong with $2.3 billion of cash and it gave robust results this quarter. LinkedIn thus offers a strong potential to be in one’s portfolio. Though the stock is currently trading at historic highs, I would wait for a dip to invest in this stock.