Estimating Growth Of LinkedIn’s Talent Solutions Business

-5.48%
Downside
196
Market
185
Trefis
LNKD: LinkedIn logo
LNKD
LinkedIn

LinkedIn‘s (NASDAQ:LNKD) stock has come down by almost 20% since its mid-September high of $257. Much of this decline can be attributed to slower-than-expected growth in recent quarters, especially in talent solutions business, which holds the biggest promise for the company. This segment essentially caters to firms and recruiters, offering them tools and services to match right candidates with the available job profiles. We estimate that talent solutions, which also includes job listings, constitutes roughly 50% to our price estimate for LinkedIn. In this analysis, we look at the total addressable market and estimate additional upside for the company under a different penetration level. We conclude that LinkedIn’s revenues from talent solutions business could grow to $5 billion by 2020, assuming that it can capture 30% of the market.

Our price estimate for LinkedIn stands at $141, implying a discount of about 30% to the market price.

See our complete analysis for LinkedIn

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How Has The Growth Been So Far?

LinkedIn’s corporate customer base has grown from 900 at the end of 2008 to about 24,444 by the end of 2013, resulting in a compounded annual growth rate (CAGR) of 119% for talent solutions revenues. The increase in average revenue per customer (ARPU) also played a notable role in this growth as we estimate that the figure jumped from $17,276 in 2008 to nearly $23,248 in 2013, implying a CAGR of 6% (this excludes revenues from job listings that we show as a separate driver). It is therefore clear that most of the future revenue growth will come from a higher customer base as there may only be limited room for increasing ARPU. The proportion of talent solutions revenues in LinkedIn’s overall sales has also increased historically which reinforces our belief that this segment is driving the bulk of LinkedIn’s valuation.

The Global Opportunity

LinkedIn mentions that the global recruitment solutions market stands at $27 billion. If these estimates are to be believed, the company has barely scratched the surface as its total revenues stood at a little over $1.5 billion in 2013. Here we try to estimate the opportunity in talent solutions segment, wherein we only consider the revenues earned by selling recruitment products to corporate customers, usually under medium-to-long term contracts.

For the purpose of estimation, we assume that only the companies with annual revenues in excess of $10 million will consider spending on LinkedIn’s services for hiring. Hoover’s business database, which is owned by Dun & Bradstreet, has close to 862,190 companies listed that qualify our criteria. However, we believe that not all of them can be considered under the addressable market as LinkedIn is primarily meant for knowledge workers. Professionals from certain industries find LinkedIn much more useful than others, and these industries include financial services, management consulting, insurance, marketing and others. In absence of industry-wise data, we exclude 50% of these companies which leaves us with roughly 431,000 companies. For the sake of simplicity, we assume the addressable market to be 400,000 companies. In other words, LinkedIn barely has 6% of this market. We currently forecast LinkedIn’s corporate  customer base to reach 71,479 by the end of our forecast period, implying a market share of little under 18%. If the company was to penetrate 25% of this market, it would imply 100,000 corporate customers and result in revenues of close to $5 billion assuming 5%-6% annual growth in ARPU (Unlike the figures mentioned previously, this implicitly includes revenues from job listings as well).  This could result in additional upside of 20% to our current estimates.

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