LinkedIn: Opportunities & Threats (Part 1)

LinkedIn’s (NASDAQ:LNKD) stock has rewarded its investors well. The company continues to grow rapidly in both the U.S. and international markets. Given that the overall recruitment industry stands at $27 billion and that LinkedIn has successfully disrupted it, the opportunities for the company are immense. And yet, there are threats too, and costs that LinkedIn has to pay to sustain its rapid growth. In this analysis, we’ll look at some key growth opportunities and will follow up with another note discussing the primary risks that the company faces. The opportunities include: 1) the growing adoption of LinkedIn’s recruitment services among corporations; 2) growing urbanization; 3) changing attitudes towards employment; and, 4) increasing premium subscriptions.

See our complete analysis for LinkedIn

Opportunity: Growing Adoption Among Corporate Customers & Marketers

Traditionally, corporations have relied on their own career portal, campus hiring, recruitment agencies and job boards to hire employees. However, the landscape of the recruitment industry is changing as LinkedIn continues to innovate and connect recruiters and candidates through its social networking platform. The services offered to corporate customers revolve around connecting them with desirable candidates by providing advance search tools and algorithms. Additionally, new tools such as sales navigator can be used by marketers to reach the right customers and promote their brands.

The number of corporate customers using LinkedIn’s services has grown from just 1,600 in 2009 to around 24,600 currently (a 2013 estimate). We further expect this figure to reach more than 70,000 by the end of our forecast period as the company continues to expand internationally. Additionally, the average revenue per corporate customer has jumped from $13,500 in 2009 to close to $22,600 currently (2013 estimate). There is clear evidence that corporate customers are paying more as they realize LinkedIn’s value.

Opportunity: Changing Attitude Towards Employment And Urbanization

With growth in global economy, industrialization and the emergence of new technologies, job opportunities have increased. The average employee has become more ambitious and the attitude towards employment has shifted from finding a safe job to doing meaningful work and constantly striving for success. This has encouraged people to shift jobs more frequently, leading to a boom in the recruitment industry. This will benefit LinkedIn as the company not only helps active job seekers, but also the passive ones, thus opening up a whole new target customer base. Additionally, increasing urbanization will fuel employment growth in emerging markets and aid LinkedIn’s business in the long run.

Opportunity: Growing Premium Subscriptions

Although a very small fraction of LinkedIn’s total user base currently subscribes to its premium services, we expect this proportion to grow going forward. The company has made several product enhancements in recent quarters including endorsements, redesigned company pages, launching the website in local languages, new profile features, notifications, the ability to follow thought leaders, and sponsored jobs to help companies promote key positions to the right people. In addition, the newly launched functionality of adding rich media content such as photos and videos is helping spur user activity on the site. These rich profile features make LinkedIn’s platform attractive for recruiters, which should encourage individuals to sign up for premium services to take advantage of potential job opportunities and market themselves more effectively to corporations.

We estimate that LinkedIn’s average unique monthly visitors for 2013 will be 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 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. ^[1] However, this is ad revenue which is not directly comparable to the 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 revenue in the long run. This can result in 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.

Threats

While LinkedIn’s opportunities are immense, it also faces some threats that the market may not be appropriately accounting for. These include consistent high marketing and R&D costs, potential future competition and the slowdown in revenue growth due to most of the expansion coming from low income countries. We’ll discuss these risks in more detail in our upcoming analyses.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Facebook’s SEC Filings [↩]