2.5% Of LinkedIn’s Visitors Upgrading To Premium Would Help Justify Market Price
Premium subscriptions, although the least important of LinkedIn’s (NASDAQ:LNKD) business segments, still accounts for roughly 15-20% of the company’s value, according to our estimates. This business earned $190 million in revenues in 2012, and is on track to grow by more than 40% this year. A lot of this growth will be driven by LinkedIn’s international expansion, enhanced features and capabilities that will attract user upgrades, and its growing popularity as an effective recruitment platform. Currently, a very small fraction of LinkedIn’s users are premium members and there is a significant opportunity to expand. A case where even 5% of the monthly unique visitors subscribe to premium services can lead to a 50% upside to our price estimate ($133) for the company and close a significant of the gap between our valuation and the market price of $243.
See our complete analysis for LinkedIn
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What’s Driving Premium Subscriptions?
LinkedIn has made several product enhancements in recent quarters 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 the right people. The company has also been experimenting with a new feature, Sales Navigator, and the initial results have been promising. Sales Navigator can be a useful product for LinkedIn as it helps sales professionals in better targeting customers, building relationships and marketing their products.
LinkedIn is not restricted to just recruiting anymore; it is becoming a great platform for marketers to find potential customers for their products through LinkedIn’s tools. The company launched ‘LinkedIn Contacts’ feature in the second quarter, rolling it out to a limited user base of about 1 million members. [1] The results were promising and there was notable improvement in user engagement. In addition to this, the newly launched functionality of adding rich media content such as photos and videos is helping spur the user activity on the site. The ‘endorsements’ are growing, LinkedIn’s Influencer program has done well, and its newly introduced channels have been helpful in streamlining the content flow for users. LinkedIn’s users are now following over 10 million channels, which make it easier for them to find relevant professional content.
The bigger picture is that as LinkedIn’s feature enhancements are creating an ecosystem that will be increasingly used by recruiters and marketers. Premium membership gives users access to better search tool and networking capabilities, to take advantage of the ever growing platform and connect with professionals and recruiters.
Upside Opportunity If 2.5% of Unique Visitors Become Premium Members
We expect LinkedIn’s average unique monthly visitors for 2013 to be at around 190 million. If 5 million members, which is roughly 2.5% of this figure, upgrade to premium membership, our price estimate can jump by 50%. Here is how we think about this. LinkedIn’s premium membership prices in the U.S. for different tiers of service stand at $250 per year, $500 per year and roughly $1,100 per year. Assuming that 75% of the premium members subscribe to the basic tier, 20% to the second tier and 5% to the third tier, the average premium membership fee per user in the U.S. will amount to about $340 per year.
How do we estimate the same for international markets? If we look at Facebook’s metrics, we find a significant difference between the monetization levels of the U.S. and international markets. In Q4 2012, Facebook’s ad revenue per user for North America was 6 times that for Asia, 2.4 times that for Europe and 7 times that for the rest of the world. [2] However, this is ad revenue which is not directly comparable to subscription business in consideration.
Looking at LinkedIn’s prices in India and the U.S., we conclude that the prices are more or less comparable in dollar terms. This may be due to the fact that the company’s premium services are targeted at professionals who are capable of paying such amount. If that is the case throughout, our hypothetical scenario of 5 million premium members and global premium subscription pricing of $340 implies additional $1.7 billion revenues in the long run. This can result in an upside of about 50% to our current price estimate. For comparison, our current LinkedIn valuation is based on $1.5 billion in total 2013 revenues growing to $6.2 billion in revenues by 2020.
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