LinkedIn (NYSE:LNKD) has been making efforts to improve its services and introduce additional features to sustain its position as the leading network for professionals, and an effective recruiting platform. The market has been a lot more supportive of LinkedIn compared to other Internet firms such as Facebook (NASDAQ:FB) and (NASDAQ:ZNGA). This could be due the significant promise and steady growth that LinkedIn has shown in connecting and recruiting professionals.
However, our price estimate for LinkedIn stands at $54, implying a discount of more than 50% to the market price. We believe that to justify its current price, LinkedIn will have to show very high levels of revenue growth driven by explosive growth in several metrics that seem quite unlikely for now. (see Why LinkedIn Is Dramatically Overvalued At A Near 1,000 P/E)
LinkedIn recently started a new feature called ‘endorsements’ on its network. This feature lets professionals endorse the skills of their colleagues and friends, providing additional authenticity. Apart from this, LinkedIn has also redesigned the company pages for better user engagement and more effective job hunt.  The idea is to create more credibility, user focus, personalization, and effectiveness in the recruitment process. This will allow LinkedIn to charge more from its corporate clients in the future. Recruitment services and job postings contribute almost 50% to LinkedIn’s value, with the rest coming from marketing and premium subscriptions.
Traditional recruitment portals such as Monster (NYSE:MWW) rely on a simple method of job and resume postings, allowing companies and candidates to search what they want. LinkedIn takes this one step ahead by including a social component and greater interaction to aid the user in finding the right job and the companies in finding the right candidate. Endorsements, recommendations, connections, updates and other features help in creating personal profiles of professionals that could be used by employers to determine the fit. LinkedIn already has 175 million members on its network, and this figure continues to grow.
However, all of these positives don’t support the sky-high valuation of LinkedIn in our view. The growth is going to slow down as the user base increases and competitors spring up due to low entry barriers. We expect Monster to innovate and Facebook to make significant steps in this direction in the future.Notes: