As LinkedIn (NYSE:LNKD) releases its Q3 2012 earnings on November 1, we’ll watch for the change in its growth trajectory, future plans and any color on how the company’s research and development (R&D) and selling, general and administrative (SG&A) costs are going to trend in the future. These are some of the key factors that will drive the company’s value. Over the past few months, LinkedIn has continued to improve its service by introducing new features and designs. The company has also expanded internationally which is going to be an important factor for sustaining future growth. Even though LinkedIn seems to be doing well in its business, the market valuation still appears to be too high.
Q3 Milestones Demonstrated Continued Progress
LinkedIn started a new feature called ‘endorsements’ last month on its network. This feature lets professionals endorse skills of their colleagues and friends, providing additional authenticity. Apart from this, LinkedIn has also redesigned the company pages for better user engagement and more effective job hunt. The idea is to create more credibility, user focus, personalization, and effectiveness in the recruitment process. This will allow LinkedIn to charge more from its corporate clients in the future.
The company also launched Danish and Norwegian versions in Q3 and surpassed the 10 million member mark in the U.K.  Given that the U.K. has a population of little over 60 million, a 10 million member base implies an extremely high penetration among professionals. International expansion is a going to be a key strategy for LinkedIn’s future growth. In Q2, about 70% of the new members came from international markets (outside the U.S.), and we expect this trend to continue.
Operating Expenses Remain A Concern
LinkedIn has had to incur high operating expenses to fuel its rapid expansion. We expect it to rein in the expenses going forward and we project its expenses (as a percentage of gross profit) to decline every year. The two cost items that investors should consider are R&D and SG&A costs. These two figures stood at 27% and 51% of LinkedIn’s total gross profits, respectively, in 2011. We forecast the R&D figure to drop from 27% to 17% by the end of our forecast period and the SG&A figure to decline from 51% to 37% for the same period. If LinkedIn has to claim any remote justification for its current market price, it will need to leverage its growing user base much more efficiently than we currently see. The upcoming earnings results will give us more color on the company’s current ability to leverage its growing base to reduce costs.
Our price estimate for LinkedIn stands at $54, implying a 50% discount to the market price.Notes:
- LinkedIn’s Press Releases [↩]