Revising LinkedIn Estimates On Stronger Growth But Stock Still Looks Rich

We recently upgraded our price estimate for LinkedIn (NASDAQ:LNKD) to $133 based on the recent earnings results and the company’s continued strong growth. We have substantially raised our forecasts for the number of corporate customers that LinkedIn can target, the total number of members as well as the number of unique visitors. While we have frequently voiced our concern about LinkedIn’s market price being too high, there is strong evidence that the company’s growth momentum may continue in the near term. LinkedIn is being innovative about its approach and has successfully managed to stay miles ahead of the competition.

Despite our substantial revision, our price estimate stands roughly 40-45% below the current market price. There are certain risks that need to be considered and a slowdown in growth can impact the stock significantly.

See our complete analysis for LinkedIn

What Parameters Did We Raise?

Ads & Marketing – This business constitutes roughly 30% of the company’s value and generated close to $258 million in revenues in 2012. Given the surge we have seen in the number of LinkedIn’s unique visitors in the first half of 2013, we have increased the growth forecast for the coming years. For 2013, we expect the average unique visitor count to grow to 184 million. We further forecast this figure to reach almost 480 million in the next six years as opposed to our previous forecast of 300 million. LinkedIn is making efforts to increase user engagement with features such as ability to add photos and videos, LinkedIn Contacts, channels, influencer program, likes, automated updates, ability to follow thought leaders and endorsements. These features make it easier for the users to streamline the content and more efficiently search for relevant jobs, candidates and customers. LinkedIn’s utility for professionals and corporates is drawing new members every quarter and fueling the company’s international growth. There is still a huge scope of expanding in Latin America and Asia-Pacific as the number of Internet users in these markets are likely to grow rapidly over the next few years.

The global population stands at over 7 billion and the global workforce is 3+ billion in size. These figures will only grow and it may not be outrageous to think that LinkedIn can have 500 million unique visitors if it maintains its competitive advantage.

Recruitment Services & Job Postings – This business constitutes roughly 50% of Linkedin’s value and almost doubled its revenues in 2012 to $524 million. It appears that this segment is headed for another stellar year and could register revenue growth north of 80%. We have substantially raised our forecast for the number of corporate customers that use LinkedIn’s services to find talent, and expect slightly higher growth in the number of job postings.

According to World Federation of Exchanges, there were over 45,000 publicly listed companies worldwide at the end of 2010. However, this represents only a small fraction of the total number of companies worldwide. As LinkedIn expands, a lot of companies, both public and private, as well as young cash-rich start-ups are likely to hunt for talent through LinkedIn, which will drive the growth in the number of LinkedIn’s corporate customers. We now expect this figure to grow to 60,000-70,000 over the next six years, up from our previous forecast of 50,000.

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 the right talent as well as customers.

In addition to the above, we have also substantially increased our forecast for the total number of registered members. The rationale for this is similar to that for the number of average unique visitors.

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 decline 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 49% of LinkedIn’s total gross profits, respectively, in 2012. 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 37% 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.

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 in the future. A slowdown in the growth could hurt the stock as the high P/E (price to earnings ratio) suggests that the market is mainly pricing LinkedIn’s stock on high expected earnings growth. Companies such as Google (NASDAQ:GOOG) and Facebook (NASDAQ:FB) have a vast amount of information and influence over their Internet user base, which can allow them to create viable recruitment portals.

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.

Our price estimate for LinkedIn stands at $133, implying a discount of about 45% to the market price.

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