LinkedIn (NYSE:LNKD) demonstrated continued fast paced growth this quarter when it released its Q3 2012 financial results Thursday. As a result of rapid international expansion and increased customer engagement, the company was able to grow revenues by 81% in Q3 2012 compared to the same period a year ago. For LinkedIn, the quarter was all about important milestones and multiple product enhancements. The company is banking on growth from expansion in international markets, improving revenue per customer and its attempts to make users spend more time on its website.
However, we believe the company is trading at a very high valuation. It will be unrealistic for it to continue with extremely high growth that can justify its market price. We expect the growth rate to come down next year due to a higher revenue base and the fact that the increased use of the mobile platform will have a negative impact on its advertising business, which contributes roughly 25% to LinkedIn’s value as per our estimates.
How LinkedIn Is Trying To Keep Up Revenue Growth
LinkedIn has made several product enhancements including endorsements, redesigned company pages, launching the website in local languages such as Danish and Norwegian, new profile features, notifications, and the ability to follow thought leaders, and sponsored jobs to help companies promote key positions to right people.  The idea behind all these features is to encourage users to spend as much time as possible on LinkedIn’s network and help extract more money from recruiters and marketers.
Increased user engagement will transform into higher page views, thus directly helping LinkedIn’s advertising revenues. LinkedIn’s total page views increased by 21% in Q3 2012 compared to the same quarter a year ago, amounting to almost 9.2 billion.  However, this includes the impact of the Slideshare acquisition. Excluding that, LinkedIn’s page views grew by 17%.  On comparing the page views to revenue growth it is clear that LinkedIn is improving monetization on a per page view basis and that’s good news. This is where Facebook (NASDAQ:FB) is facing some challenge for now.
Higher user engagement also implies that users are more likely to find a job through LinkedIn compared to other platforms such as Monster (NYSE:MWW). Therefore, by increasing user engagement, LinkedIn is not just favoring its advertising business but also increasing the chances of recruitment success, thus improving its recruitment services and job posting business. This segment contributes close to 50% to LinkedIn’s value.
In addition to increasing user engagement, LinkedIn is focusing on international expansion. Close to 70% of its new users came from international markets in Q3 2012.  As of now, about 63% of LinkedIn’s total user base is international.  On the revenue front, international markets account for only 36% of total revenues implying that there is a significant opportunity to improve monetization. 
Expenses Need To Be Controlled
While gross margins have improved in the first nine months of 2012, SG&A and R&D costs have increased. These two figures stood at 51% and 27% of LinkedIn’s total gross profits, respectively, in 2011. LinkedIn will need to control these costs over the coming quarters else revenue growth might not be enough to keep the investors interested.
We have no doubts that LinkedIn has a good business model. But we do have our doubts regarding its high valuation, fueled by growth it has seen in the recent quarters. To know why we think LinkedIn is highly overvalued, see LinkedIn’s Growth Is Highly Overvalued And Competitive Risks Ignored
We are in the process of updating our valuation model for LinkedIn in light of the recent earnings and will have an update ready soon.
Our price estimate for LinkedIn stands at $54, implying a 50% discount to the market price.Notes: