LinkedIn Has Global-Mobile Growth But Rising Costs A Concern

by Trefis Team
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LinkedIn (NYSE:LNKD) reported its earnings for the first quarter last week. [1] It posted revenue of $188.5 million, which has more than doubled year-over-year. Its registered user base has increased to 160 million, growing 58% year-over-year while its corporate solutions customer base has expanded to 10.4K, growing 118% year-over-year. LinkedIn competes with Facebook and Google (NASDAQ:GOOG) in the social networking space, and Monster (NYSE:MWW) in the online job search market.

See our complete analysis for LinkedIn

Jeff Weiner, CEO of LinkedIn said:

“LinkedIn’s solid performance in the first quarter built on the company’s momentum in 2011. We saw strength across all key metrics from member signups and engagement to significant revenue growth across our three product lines.”

User growth expected to continue

LinkedIn had an average of 118 million registered members in 2011. We expect it to increase to 176 million in 2012. With its user base expanding to 160 million at the end of Q1 itself, LinkedIn seems right on track to achieve that target. You can check out the impact of any increase or decrease in its registered user base over the years on its value using this chart.

Most of LinkedIn’s growth will come from its expansion into new markets globally. Since all of LinkedIn’s businesses are linked to its user base in one way or another, any increase in its user base will drive page views, higher subscription revenue and also attract more corporate customers wanting to access the growing user base, driving revenue from all of its core businesses.

Mobile to drive platform engagement

LinkedIn is focused on its mobile offerings, which could significantly increase the level of engagement on its platform. It saw unique mobile visitors grow nearly 275% this quarter. Mobile visitors now account for nearly 22% of its total unique visiting member base. LinkedIn recently launched its iPad app, and is present on all major smartphone platforms. It may generate additional ad revenue, by rolling out interactive mobile ad units.

Operating expenses need to be kept in check

LinkedIn saw its operating expenses nearly double in the last quarter, primarily due to its aggressive business development initiatives. Its marketing expenses grew 125% and may be a significant drag on its earnings if LinkedIn fails to reduce them as a proportion of its revenue/gross profit. We expect LinkedIn to rein in these costs as a percentage of its gross profits, going forward as its revenues increase faster than expenses. However, if it’s unable to do so, there could be a significant downside to its value.

We currently have a $44 Trefis price estimate for LinkedIn, which stands nearly 60% below its market price. Here’s why we think LinkedIn is highly overvalued.

  1. LinkedIn Q1 2012 Earnings Call Transcript, Morningstar []
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