We recently upgraded our price estimate for LinkedIn (NASDAQ:LNKD) from $60 to $90 based on the recent earnings results and the company’s continued growth in the recruitment industry. We have substantially increased our forecasts for job postings that LinkedIn can achieve, corporate customers that it can target as well as growth in ad revenues. LinkedIn is being quite innovative and experimenting with several products that seem promising, including Sales Navigator. The company is not just about recruiting anymore; it is becoming a great platform for marketers to find potential customers for their products through LinkedIn’s tools.
As LinkedIn heads into 2013, the growth from sheer user base expansion may slow down, and the company will have to shift its focus on increasing user engagement and better monetization of its platform. LinkedIn is already doing that and launched numerous features during the fourth quarter. The opportunities from job postings, premium recruiter subscriptions as well as individual professionals and sales tools such as its Sales Navigator application are immense.
Despite our substantial upgrade, our price estimate stands roughly 45% below the current market price. There are certain risks that need to be considered and a slowdown in growth can impact the stock significantly.
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What Parameters Did We Increase?
Ads & Marketing – This business constitutes roughly 30% of the company’s value and generated close to $258 million in revenues in 2012. We have increased our revenue growth forecast for this business as we expect a higher number of page views per visitor as well as higher revenue per page view. LinkedIn is making efforts to increase user engagement with features such as likes, automated updates, ability to follow thought leaders, endorse each other, etc. This is likely to drive the usage of the site and increase the number of page views per visitor. In addition to this, increased user engagement will enhance the user data that LinkedIn has. This in turn will help in more targeted advertisements that generate higher return on investment (ROI) and hence command higher pricing.
Recruitment Services & Job Postings – This business constitutes roughly 50% of Linkedin’s value and generated around $524 million in total revenues in 2012, registering annual growth of 100%. We have increased our revenue growth forecast for this business segment as we expect a substantial increase in job postings as well as higher growth in corporate customers that use LinkedIn’s services to find talent.
Looking at the available job postings on some of the biggest online job portals such as Simply Hired and using data from other sources such as the Bureau of Labor Statistics and LinkedIn’s job postings, we conclude that there exists a market of close to 3 to 6 million in global job postings that LinkedIn can target (see What’s LinkedIn’s Opportunity In The Job Postings Market). And these are not annual postings, which will be much higher, as job postings on LinkedIn tend to refresh every 30 days. In addition to increasing the job postings forecast, we also increased the forecast for the number of corporate customers who will use LinkedIn’s premium services for finding right talent as well as customers.
LinkedIn saw growth across all its business segments and key metrics in Q4 2012. Overall revenues grew by 81% with the highest growth coming from LinkedIn’s talent solutions segment (~90%).  This segment includes revenues from job postings as well as recruitment services under which LinkedIn charges companies and provides them with premium recruitment tools and search capabilities. Even though growth across other business segments such as premium subscriptions and marketing solutions was quite high, there is a clear evidence that LinkedIn has a big opportunity to become the market leader in the talent hiring industry.
However, There Are Risks To Consider
The current market price implies a much higher growth than we currently forecast. LinkedIn has had to incur high operating expenses to fuel its rapid expansion. We expect it to rein in expenses going forward and we project its expenses (as a percentage of gross profit) to decline every year. However, even if you assume that LinkedIn’s expenses will be reduced by a lot more than what we currently expect, this would not move the stock’s value meaningfully.
The two cost items that investors should consider are R&D (research and development) and SG&A (selling, general and administrative) expenses. These two figures stood at 25% and 59% of LinkedIn’s total gross profits, respectively, in 2011. We forecast the R&D figure to drop from 25% to 15% by the end of our forecast period and the SG&A figure to decline from 51% to 35% during the same period. If LinkedIn has to claim any justification for its current market price, it will need to leverage its growing user base much more efficiently than we currently see.
We also believe that the market is not pricing in future competitive risks adequately. Although LinkedIn currently has a unique advantage of mixing social networking with recruitment services, other Internet giants can leverage their data and experience to do something similar. These include Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) which have a vast amount of information and influence over their Internet user base to allow them to create viable recruitment portals to pose a serious threat to LinkedIn.
Facebook has already started moving in this direction with its Social Jobs app, and may slowly create an ecosystem for professionals. LinkedIn currently has a brand that is recognized in professional context, but so did Netflix (NASDAQ:NFLX) (in context of Internet video) at one point of time. It didn’t take long for companies with deep pockets to come up with competing services.Notes:
- LinkedIn’s SEC Filings [↩]