LinkedIn’s (NASDAQ:LNKD) stock has risen by a massive 90% in 2012, thanks to sustained high revenue growth across business segments, international expansion, continued efforts in mobile, and numerous feature enhancements. The biggest question going into 2013 is whether LinkedIn can sustain this high growth?
We believe the current market valuation seems too high from several measures. Our price estimate for LinkedIn stands at $60, implies a discount of roughly 50% to the market price. We believe the market is not accounting for potential future competition that can slow LinkedIn’s growth, or just the fact that as the revenue base becomes larger, growth will slow. In 2013, we expect the company to continue to push Sales Navigator service, expand further internationally, especially in China, and gain from its integration with Microsoft Office.
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Revenue Growth Remained High In 2012
We estimate that revenues from LinkedIn’s ads and marketing business grew by roughly 55-60% in 2012. This resulted from an estimated 45% increase in LinkedIn’s average monthly unique visitors, which amounted close to 123 million for 2012. In addition, LinkedIn was able to better monetize its business with ads, resulting in an improvement of estimated 20% in ad revenue per page view. We estimate the ads and marketing business constitutes roughly 25% to LinkedIn’s value.
We further estimate that the company’s revenues from premium account subscriptions grew by 75%. Although this may seem like a big jump, the revenue base is small compared to that of the ads and marketing business. We observed roughly 50% growth in LinkedIn’s average registered members for 2012, which amounted to roughly 177 million. In addition, we estimate the proportion of LinkedIn’s registered members, who are also premium account holders, increased slightly in 2012. Professionals and companies are increasingly realizing LinkedIn’s value when it comes to matching the right candidates for the right jobs. The advanced search features associated with premium accounts and the ability to contact other professionals is something that LinkedIn’s users are finding useful. We estimate that premium account subscriptions constitute roughly 15% to LinkedIn’s value.
Recruitment Solutions, which includes job listings and premium screening tools for recruiters, is the biggest business segment of LinkedIn. It contributes approximately 50% to our estimated value for the company. We estimate that revenues from this segment grew by more than 90% in 2012, amounting close to $500 million (we’ll have to wait until LinkedIn releases its Q4 2012 results to see the exact figures). There was roughly an 80% increase in the number of job postings and close to 90% increase in the number of corporate customers who pay LinkedIn to hire the right candidates.
LinkedIn made several feature enhancements in 2012, including introducing the website in local languages, endorsements, sales navigator, redesigned company profile pages and a lot more. The company is trying to create an ecosystem for professionals to easily connect to the right audience and market themselves or their products. LinkedIn’s acquisition of Slideshare complements this strategy.
Valuation May Still Be Too High
However, we still believe that LinkedIn’s market valuation is too high given that the high revenue growth rate may not be sustainable in the future, sales and marketing as well as R&D costs remain a concern, and competitive risks are not priced in. Although LinkedIn currently has a unique advantage of mixing social networking with recruitment services, the barriers to entry are low. There is no reason why its competitor Monster (NYSE:MWW) cannot do something similar to enhance the interactivity among professionals and help applicants and employers in improved targeting. In addition, Internet giants such as Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) have a vast amount of information and influence over their Internet user base to allow them to create viable recruitment portals that can pose a serious threat to LinkedIn.
The market’s optimism for LinkedIn is comparable to what Netflix (NASDAQ:NFLX) saw in early 2011 when its stock price soared to $300, riding on the wave of high subscriber growth. But that wasn’t sustainable. Even though management’s missteps were a factor in the stock’s slide, one cannot deny that the competitive picture became clearer for Netflix over the past year and several giants with deep pockets have emerged as threats.
Our price estimate for LinkedIn stands $60, implying a discount of about 50% to the market price.