LinkedIn: Get In For The Long Run

By Larry Darrell on Oct 17, 2013 at 1:33 pm EST


LinkedIn's ability to monetize its user base, growth in corporate clients and success with mobile advertisements make the stock a buy

Company Profile:

LinkedIn Corp. (LNKD) is the world’s largest online professional network. It connects more than 200 million users across 200 countries. LinkedIn users create professional profiles to manage their career opportunities effectively. The company aims to provide every professional in the global workforce with an economic opportunity. The website is being increasingly used not only by employees but also by recruiting agencies and recruitment departments in corporations.

Business Model:

LinkedIn offers two types of solutions:

  1. Free Solutions
  2. Monetized Solutions

These solutions are sold both online and offline through a direct sales force.

Free Solutions:

The Free Solutions segment allows users to create and manage their professional identities, engage with professionals, and search for companies, professionals, groups and job vacancies. These solutions are freely available to everyone with a LinkedIn account and are aimed at providing professional benefits to them.

Monetized Solutions:

In the Monetized Solutions segment, LinkedIn offers Talent Solutions, Marketing Solutions, and Premium Subscriptions. The company earns more than 50% of its revenue from Talent Solutions alone.

The US is by far the biggest market for LinkedIn’s Monetized Solutions, with a 64% contribution to revenues, followed by Europe, the Middle East and Africa (EMEA) at 22%.

Talent Solutions:

Talent Solutions aid enterprises and corporations in acquiring new talent. Talent Solutions is further segmented into LinkedIn Corporate Solutions, LinkedIn Jobs, and Subscriptions. LinkedIn Corporate Solutions, with its service of LinkedIn Recruiter, provides organizations with a vast array of services which allow them to identify and hire highly qualified candidates, both active and passive. Organizations can conduct advance candidate searches and can contact them through InMail, which guarantees a response in seven days.

LinkedIn Jobs allows organizations to post job opportunities on LinkedIn’s network. The Talent Match tool matches job specifications with candidates’ profiles and recommends applicants to the job advertiser. Subscriptions include access to tools for both recruiters and job seekers so both can search for and communicate with each other.

Marketing Solutions:

Marketing Solutions allow advertisers to reach the relevant target audience and interact with it. These solutions allow advertisers to display ads, create groups for their content, sponsor a part of a website, and do a lot more. Marketing Solutions also includes LinkedIn’s latest offering of Sponsored Updates which appear on the homepage of a Marketing Solutions consumer.

Premium Subscriptions:

Premium Subscriptions are for individual members, small and medium enterprises, and groups within larger enterprises who want to maintain their professional identity and help their business flourish while connecting with talent. It includes many features, such as the ability to see who is viewing your profile and what keywords are they using to do so. Sales Navigator, part of Premium Subscriptions, allows sales professional to accelerate sales management.

Historical Key Metrics for LinkedIn:

LinkedIn, like other social networks, depends on key metrics such as the number of registered members, the number of unique visitors and also the number of corporate solutions customers and sales channel mix, to determine its growth.

The number of registered members is an important growth indicator for LinkedIn, as it is a key selling point. The bigger the pool of active and passive members, the better it is for organizations looking to hire. In the second quarter (2Q) of 2013, LinkedIn had 238 million registered active and passive members. Active users are those who are seeking job, so this number especially affects LinkedIn’s attractiveness for recruiters and thus LinkedIn’s growth.

The number of unique visitors is an indication of how many people visit LinkedIn even if they are not registered members. This number shows the level of user engagement and helps gauge brand awareness. Unique visitors can also create a buzz for LinkedIn through word of mouth, which eventually results in sales growth for LinkedIn products. This increase in traffic helps LinkedIn determine usage patterns on its website, to improve their products for their consumers.

With the mobile application market booming, the LinkedIn mobile app has become more important. 33% of the unique visitors were from its mobile app in 2Q13, compared to 21% in 2Q12.

Corporate Solutions’ customers represent a core part of LinkedIn’s earnings. Their growing number continuously adds to the revenue stream. As of 2Q13, the company had 20,256 corporate customers, representing a 65% year-over-year (YoY) growth.

Field and online sales are the two primary ways through which the company sells its services. Over the years, field sales have been more than 50% of the total sales. Field sales are integral drivers in soliciting customers and agencies. An increase in its direct sales force caused LinkedIn’s revenue in 2012 to grow by 36%, a four percentage points increase YoY.

Future Growth Drivers for LinkedIn:

Bidness Etc. believes that LinkedIn might be an agent for change in human resource recruitment. IDC estimates that the addressable market for LinkedIn’s Talent Solutions is $87 billion. 15% of that market is online recruitment. Bidness Etc believes LinkedIn can tap into this market and revolutionize traditional human resource recruitment.

According to LinkedIn’s Earnings Call of 2Q13, there are around 100,000 companies which have more than 500 employees. LinkedIn has just 20,000 Corporate Solutions customers, which makes its penetration around 5-6% only. Credit Suisse research says that there are an estimated 745,000 businesses globally who have more than 100 employees. According to this classification, LinkedIn’s penetration is a mere 2.5%.

LinkedIn is also cost beneficial for recruiters. Recruitment agencies charge 8% to 25% of the annual salary of a candidate upon successful hiring. For a person earning $100,000 a year, this means agencies charge $8,000 to $25,000 on one successful hire. LinkedIn Talent Pro, their highest tier service, charges a maximum of just $4,779 in comparison. This gives the company an edge over its competitors. As global hiring picks up, it will drive LinkedIn’s growth.

In Marketing Solutions, which contribute 26% to LinkedIn’s total revenues, LinkedIn has introduced products which will drive future growth. Similar to the ads of Facebook, Inc. (FB) in Newsfeed, LinkedIn has introduced Sponsored Updates which appear on members’ homepages. Sponsored Updates lead to 22 times more conversion of leads as compared to banner ads. Sponsored Updates also have a 32% lower cost per lead. Sponsor Updates currently have a negligible contribution to LinkedIn‘s revenues since it has been recently launched; however, LinkedIn can monetize on the increase in global mobile ad spending and social advertising using Sponsor Updates. According to Citi estimates, Sponsored Updates on both mobile and desktop platforms will contribute around $42 million in to linkedin’s 2014 revenues , with a 32% five-year CAGR* from 2014 to 2019.

On the user engagement front, LinkedIn has been introducing new products which will increase traffic. It has introduced LinkedIn Contacts, a professional address book so professionals can stay in touch with their networks. It has also introduced CheckIn so campus recruiters can streamline their online and offline recruiting activities to hire the most suitable students. Recruiters will require students to apply for job vacancies through their LinkedIn profiles.

LinkedIn has also introduced a feature in which users can upload media content to their LinkedIn profiles. Users can thus make an online portfolio instead of just a resume. We believe that social aspects of networks like Facebook and LinkedIn will start to converge. For example, LinkedIn has also adopted status updates and the ‘like’ button from Facebook.

The role of LinkedIn Influencers, who have professional insights and advice – and include figures such as Richard Branson and Bill Gates – has gained prominence. Their contributions have led to an increase in page views; for example, a post by Bill Gates got a million page views after just two days. This has led to increased user engagement with the LinkedIn website.

2Q13 Performance:

LinkedIn had a strong second quarter, with record revenues of $364 million which grew 59% YoY. It has a three-year revenue compound annual growth rate (CAGR) of more than 100% since revenues soared from $120 million in 2009 to $972 million in 2012. Its EPS increased 72% year-over-year (YoY) in 2012. Talent Solutions grew 69% YoY, Marketing Solutions grew 36% YoY, and premium subscriptions grew 68% YoY

Over the past year, LinkedIn has outperformed the NASDAQ-100.


Relative Valuation:

LinkedIn is currently trading at a one-year forward price-to-earnings multiple of 102x, which is higher than Facebook’s 50x but lower than Yelp (YELP) and Pandora Media, Inc. (P). This high valuation reflects expectations of high growth. However the stock is not expensive if we look at 2018 multiples. Sell side is expecting its EPS to grow at a 3-year CAGR of 45%, higher than that of Facebook.


LinkedIn is capitalizing on the growth of mobile advertisements. While this is the primary driver of its stock price, factors like increased global hiring will also benefit the stock. LinkedIn poses a cheaper way for companies to hire new employees and it is drastically changing human resource recruitment activities. Coupled with a healthy three-year EPS CAGR and promising growth prospects, Bidness Etc. recommends investors to buy its stock.


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