LinkedIn Has Huge Potential But Slower Growth Weighs On Its Valuation

by Trefis Team
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LinkedIn (NASDAQ:LNKD) recently released its Q1 2013 earnings. While the results were strong, the stock fell due to weaker-than-expected outlook. LinkedIn saw significant growth in the number of unique visitors which directly speaks to its efforts in improving the site design and adding multiple features for better user engagement. In addition to this, its mobile app continued to see strong growth and accounted for about 30% of overall unique visitors during the quarter. [1] While the quarter’s revenues grew by 72%, the company expects full year revenues to grow by 47-50%. [1]

LinkedIn has become an effective tool for job seekers, recruiters and marketers to find the right audience and opportunities. In one of its investor presentations, LinkedIn stated that the addressable market size for worldwide talent acquisition and staffing services is $27 billion. [2] Given the company’s competitive advantage and the fact that it earned less than $1 billion in revenues in 2012, there is still a big opportunity to grow.

See our complete analysis for LinkedIn

Revenue Growth Remained Strong

LinkedIn showcased another quarter of solid revenue growth (72%) driven by international expansion and higher monetization. At the end of Q1 2013, about 64% of the company’s total user base was international. [1] However, international markets accounted for only 38% of total revenues, implying that there is a significant opportunity to improve monetization. [3] These figures remained flat versus the previous quarter (Q4 2012), which indicates that the company’s growth is stabilizing and may slow down in the future.

LinkedIn is seeing immense success in developed markets, but expansion in emerging markets such as India and Brazil has put some pressure on its overall monetization. However, these markets also offer good growth potential from long term perspective and the absence of strong direct competitors will help the company continue its expansion. Overall, including Slideshare, LinkedIn saw close to 170 million unique visitors in the first quarter. [1] Excluding Slideshare, the unique visitor count stood at 132 million, substantially higher than that in Q4. [1] Although, LinkedIn’s unique visitors have grown consistently, this quarter saw a significant jump indicating higher user engagement.

Focus Continues To Be On Mobile

Like everyone else, LinkedIn is making efforts to capture the growth in the mobile market. In the first quarter of 2013, mobile platform accounted for 30% of the total unique visitors versus 19% a year ago. [1] The number of page views including mobile grew by approximately 63%, compared to just 31% growth for desktop. [1] To bolster its mobile offering, LinkedIn also acquired the newsreader app Pulse recently for $90 million in a transaction that included 90% stock and remaining cash. With Pulse’s more than 30 million users, LinkedIn can boost content offering on its app and website to increase user engagement and improve its targeted search.

Increasing User Engagement Remains A Priority

LinkedIn continues to make 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.

LinkedIn 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. The company is now launching the ability to add rich media (presentations, photos and videos) for its members, which can help them market themselves more effectively. [1] Going forward, growth from the sheer user base expansion may slow down, and the company will continue to focus on increasing user engagement and better monetization of its platform.

LinkedIn recently made some changes to its search tool that are aimed at making search more convenient and intelligent for the users. With this change, LinkedIn users don’t need to search for people and companies independently, instead they’ll see the relevant lists from different categories as they type in the search query. The bigger picture is that as LinkedIn’s user base grows, the company will need to better organize the data resulting from this growth. There is a great value in targeted and relevant searches. They not only improve the user experience, but also help marketers, recruiters and sales professionals in efficiently reaching out to potential customers and candidates.

What’s The Outlook?

While revenues for the first quarter grew by 72%, LinkedIn expects the second quarter’s growth in the range of 50% to 53%. [1] For the full year 2013, the revenue growth could amount to somewhere between 47% and 50%. [1] Even though LinkedIn boasts of several competitive advantages when it comes to talent recruitment market, there is clear evidence that the growth is slowing down. The year-on-year revenue growth has been on a consistent decline for the past six quarters, and the trend will continue as evident from LinkedIn’s latest guidance. It appears that the market wasn’t expecting this and the stock swooned following the announced results.

Our price estimate for LinkedIn stands at $88, implying a 50% discount to the current market price.

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Notes:
  1. LinkedIn’s Q1 2013 SEC Filings [] [] [] [] [] [] [] [] [] []
  2. LinkedIn’s Investor Presentation []
  3. LinkedIn’s SEC Filings []
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