Here’s How Chinese Expansion And Other Strategies Could Impact LinkedIn’s Stock

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LNKD: LinkedIn logo
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LinkedIn

LinkedIn (NASDAQ:LNKD) is the leading professional social network, with more than 350 million members across the world. The company’s stock has fallen by over 15% over the past three months due to the weak outlook for the remainder of the year. Though our $174 price estimate for LinkedIn’s stock represents nearly 15% downside to the market, we think there are certain plausible triggers and developments that could move the stock considerably over the coming years, assuming the market prices in these developments correctly. Specifically, the possibility of more-than-expected growth in the Chinese market and LinkedIn’s engagement plays are certain areas which could impact stock price changes for better or worse. We believe the prospects of significant lift in Chinese adoption and a dramatic increase in LinkedIn’s engagement levels represent scenarios that could cause a 10% increase in our price estimate. Alternatively, increased competition in the market could lead to a downside for LinkedIn by impacting the growth of member base and of spending by corporate customers on the platform.

See our complete analysis for LinkedIn

LinkedIn’s Registered Member Base Rises To 873 Million By 2021, Along With Significant Increase In Subscription Revenue Per Registered Member (+10%):

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In our valuation model, we have forecast LinkedIn’s year-end registered members to increase from 347 million in 2014 to over 730 million in 2021. In addition, we have estimated average annual subscription revenue per registered member to rise from $1.40 to over $2.20 during the same period. We have based these forecasts on the growing popularity of LinkedIn’s services to specific professionals throughout the world. The number of Internet users is rising sharply across various markets, especially in the developing regions, because of the growing popularity of smartphones and the mobile Internet.  The the global Internet population is forecast to rise from 2.89 billion in 2014 to 3.60 billion in 2018, according to eMarketer. [1] Further, we expect LinkedIn’s strategies of focusing on mobile platform development, launching sites in local languages, providing student-specific offerings, and expanding publishing and job listings on its platform to boost member growth over our forecast horizon.

However, under a scenario, wherein LinkedIn’s year-end registered member base and average annual subscription revenue per registered member base rises to over 850 million and around $3.00 by the end of our forecast horizon, then it would take our price estimate 10% higher to $191. We believe this scenario is plausible considering the following factors:  1) Since LinkedIn received approval for its Internet Content Provider (ICP) license application for its local Chinese site in early 2015, we believe this region could account for significant growth in the coming future. If the company is able to effectively localize in the Chinese market, which other Internet giants such as Google, Facebook and Amazon have been unable to do, then it could add tens of millions of users from the country. China’s Internet population was seen at 649 million at the end of 2014, with the mobile platform accounting for over 85% of this user base. [2] Additionally, 2) LinkedIn’s Sales Navigator product (a social selling product) has gained traction among customers, and with improvements in product features and expansion to local languages, the product could contribute significantly to the revenue stream in the coming future.

LinkedIn’s Registered Member Base Increases To Only 500 Million By 2021, Along With Marginal Rise In Subscription Revenue Per Registered Member (-10%):

Although having a low probability, another scenario is plausible wherein the registered member base and average annual subscription revenue per registered member on LinkedIn increases to only 500 million and $1.60 by the end of our forecast horizon. This scenario, which represents near-10% downside to our valuation, is possible. It could take place due to the following issues:  1) LinkedIn is unable to gain significant lift in China owing to adverse government policies and intense competition from local players; 2) if the competition increases significantly in the industry due to strategic moves by other Internet companies such as Facebook, Google, Twitter, etc., or due to the development of sector-specific professional social networks. A significant rise in competition could also impact growth in spending by corporate customers on the platform; and, 3) Since LinkedIn has priced its premium subscription revenue on the basis of geography, the addition of users from developing markets could also put downward pressure on average subscription revenue per registered member.

LinkedIn’s Strategies Lead To Dramatic Increase In Member Engagement (+10%): LinkedIn is taking various measures to enhance member activity on the platform. Firstly, it has dramatically increased the number of job listings on its platform, which recently crossed 3.5 million. Additionally, the company is strengthening its publishing platform, due to which the number of weekly long-form posts crossed 100,000 in Q1 2015 as compared to 50,000 at the end of Q4 2014. The publishing feature which is currently available to all English language members, will be soon rolled out across other languages as well. Moreover, the company continues to launch separate mobile apps such as Pulse, Jobs, Connected, SlideShare, etc.,  and re-design its web-pages to strengthen its engagement levels. As a result, we have forecast LinkedIn’s average monthly unique visitors and page views per unique visitor (per month) to rise from 87.2 million and 104.2 respectively in 2014 to 168.1 million and 139.0 by 2021, respectively, by 2021. We believe these are conservative forecasts for engagement growth on the platform.

In a scenario, wherein the same metrics rise to 240 million and 155.2 respectively by 2021 under an optimistic scenario, then it would represent nearly 10% increase in our price estimate. We believe this scenario could occur if LinkedIn continues to gain popularity across the world and its competition does not increase significantly over our forecast horizon. Continued product innovation and growth in the global economy will further help boost LinkedIn’s traction among its members.

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Notes:
  1. Internet to Hit 3 Billion Users in 2015, eMarketer, November 20, 2014 []
  2. China’s internet population hits 649 million, 86 percent on phones, Reuters, February 3, 2015 []