Is This the Right Time to Buy LinkedIn?

LinkedIn  (NYSE: LNKD  ) surged 8% in after-hours trading after announcing a solid Q3 on Nov. 1. Before you get on the bull and buy a few shares yourself, let's cut through the Wall Street noise and look at what matters most in LinkedIn's Q3 earnings report.

What Wall Street cares about
CEO Jeff Weiner opened the earnings call stating that "LinkedIn had a strong third quarter, with all of [its] key operating and financial metrics showing solid growth."

Source: 10-Qs from 2011-2012.

The company reported another quarter of increasing revenues. Compared with the same time last year, revenue increased 81%, from $139.5 million to $252 million.

Source: 10-Qs from 2011, 2012.

Net income is finally in the black. As opposed to a net loss of $1.6 million last year, LinkedIn generated $2.3 million this quarter.

 Metric

Q3 2012

Q3 2011

Gross Margin

86.7%

84.2%

Operating Margin

5.6%

2%

Net Margin

1.2%

(1.1%)

Source: 10-Qs from 2011, 2012.

In terms of margin, LinkedIn is doing great. Specifically, the company doubled its operating margins -- showing that this company is focused on improving its operations as much as possible.

Operational strengths will be useful as the company continues to make inroads abroad. Currently, U.S. sales totaled $162.4 million, while international markets totaled $89.7 million.

Revenues by Region

2012 Q3

2011 Q3

United States

64.4%

67.4%

Other Americas

6.8%

5.7%

Europe

21.6%

20.7%

Asian Pacific

7.1%

6.2%

Source: 10-Qs from 2011, 2012.

Although international growth seems slow, with only a 3% total increase, the company is still optimistic about its opportunities. In Asia-Pacific regions, growth has slowed more than expected. The China slowdown has affected Australian customers, while India is facing economic challenges. Still, in the past few months, the company has hit milestones in its two largest non-U.S. markets. In India and Brazil, LinkedIn has passed 15 million and 10 million users, respectively.

How to invest Foolishly
While Wall Street likes to look at the bottom line, I think focusing on LinkedIn's products better reveals its strength as a stock. In Q3, there were four specific product developments.

1. LinkedIn increased homepage traffic 60% by overhauling its homepage to deliver a more social and relevant experience.

2. The company introduced notifications similar to Facebook's red flag feature, leading to a record level of engaged users (measured by comments, likes, and shares).

3. The new endorsements feature has allowed users to fill in more than 200 million pieces of information to each other's skills profiles that will add to LinkedIn's database.

4. LinkedIn revamped its company pages to enable companies to engage with job seekers.

Each one of these developments has helped LinkedIn buttress its career-focused ecosystem to both the consumers and recruiting departments. Specifically, LinkedIn has seen revenue increases across all its formal product categories: talent solutions, marketing solutions, and premium solutions.

Source: 10-Qs from 2011, 2012.

LinkedIn's talent solutions have outpaced its advertising and premium subscriptions. All have had phenomenal growth, but talent solutions leads the way, with a 95% revenue increase to $138.4 million. This isn't surprising. By increasing interaction on its website, LinkedIn's recruiting recommendations engines grow smarter -- enabling it to better match candidates to jobs. As a result, hiring departments and firms are realizing more and more how important LinkedIn is to finding the best talent.

So I think talent solutions are your key to making money in LinkedIn.

The Foolish bottom line
There are plenty of ways to advertise online and even more plentiful ways to connect with employees at your dream job. Because of the power of its key product, LinkedIn is still the shop to stop at when companies are looking to add employees. In the next few years, the company will continue to improve its product, user data, and job-seeking services. Meanwhile, LinkedIn's talent solutions will become a stronger service.

Although the company trades at a 694 P/E, LinkedIn's stock has fallen about 10% from its 52-week high of $125.50 in September. However, the company's growth story is far from over. As the company improved its margins and increased its revenue over the past year, the stock has risen 25%. At its current price of $106.78, LinkedIn looks like a great buy for the long term.

LinkedIn was perhaps the only technology stock that has hit it big after its IPO. Unfortunately, the same can't be said of Facebook. After the world's most-hyped IPO turned out to be a dud, most investors probably don't even want to think about shares of Facebook. But there are things every investor needs to know about this company. We've outlined them in our newest premium research report. There's a lot more to Facebook than meets the eye, so read up on whether there is anything to "like" about it today, and we'll tell you whether we think Facebook deserves a place in your portfolio. Access your report by clicking here.


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  • Report this Comment On November 07, 2012, at 4:50 PM, HowardStern666 wrote:

    Dear Mr. Fool,

    Why would you ignore the fact that LNKD is on track to book revenues of $1 billion and only show a profit of about $11 million. While nobody will argue that revenue will grow going forward, the company barely earns a profit. Even if revenue would quadruple, the EPS couldn't even support the share price at $50 even with a ridiculous P/E multiple.

    How can you ignore that $1 - $3 billion is a huge amount of revenue going forward, with no consideration of competition or technology shift.

    One day soon revenue will flaten out and then what?

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