There's Nothing Lackluster About LinkedIn's Quarter

When LinkedIn (NYSE: LNKD  ) steps up to the plate, the expectation is that the world's largest professional network will knock one out of the park. And -- metaphorically speaking -- the company's done just that for four consecutive quarters, walloping analysts' earnings-per-share targets with an average surprise of 63%.

Yesterday, just ahead of Facebook's (NASDAQ: FB  ) earnings, LinkedIn turned in a stellar at-bat once again with its third-quarter report, yet the stock lost nearly 10% in today's trading. The market seemed underwhelmed by management's outlook. For investors looking beyond the next quarter, the market pullback presents an opportunity to buy into a rock-solid business.

A vast, virtuous network
As I pointed out in an article on user growth, LinkedIn continues to add members at an impressive pace, which further enhances a key competitive advantage at this point: its network effect. Membership growth in the latest quarter outpaced the prior two quarters by 2%, hitting 38% over the last three months. LinkedIn is the online networking tool of choice for 259 million members today, up from 187 million at this time last year.

For LinkedIn, more members translate to greater interest in the network from companies looking to hire. Right now, the company has a lucrative operation working with 22,001 businesses to provide recruiting solutions. The last quarter introduced 1,745 new companies, and year-over-year growth in this category stands at 57%.

One of LinkedIn's top priorities is to "Develop products our members love." Members seem to love it, and recruiters tend to love more members. That's a virtuous cycle investors can appreciate as well.

Can heady growth continue?
On the top line, LinkedIn's growth outpaced analysts' expectations once again. Revenue jumped 56% year on year to reach $393 million. Analysts had expected revenues of $385 million. LinkedIn's not only adding new members, but it's providing enough value through profiles, search tools, and algorithms to help monetize new members or sell recruiting solutions.

Here's a look at the heady revenue growth that's become the status quo at LinkedIn:

LinkedIn's revenue growth has run like clockwork in recent quarters. And earnings, excluding certain tax items, grew even faster, up 77% against last year on a per-share basis. LinkedIn bested analyst estimates in this category as well, bringing in $0.39 per share against $0.32.

So, LinkedIn's scaling quickly even as it matures, but can investors possibly justify the lofty stock price? For comparison's sake, let's pit LinkedIn against its social network peer Facebook.

LinkedIn's size pales in comparison to Facebook's, which has at least four times as many members. Given the smaller base, the market expects higher growth from LinkedIn in terms of revenue and earnings. Right now, LinkedIn trades at 107.8 times the forward EPS estimate for the next 12 months. Facebook's forward P/E stands at 54.1.

Still, as my colleague Daniel Sparks points out, investors in LinkedIn might be betting on a better business model. A comparison of the two companies shows that Facebook's audience uses its site way more often than LinkedIn's audience. Whereas LinkedIn notes that "a substantial majority of members do not visit the website on a monthly basis," Facebook can say that 61% of its users visit every single day

While that's great for Facebook, the two companies nonetheless generate similar revenues on a per-member basis: Facebook at $1.69 and LinkedIn at $1.52 as of quarter end. So, LinkedIn seems to be doing more with less active users.

At the same time, LinkedIn is investing in all types of attention-capturing devices, including Pulse, SlideShare, and LinkedIn Influencers, all of which will help it compete as a platform for unique content. In other words, LinkedIn's making moves to boost visits in the near future. For now, however, Facebook trumps LinkedIn in terms of engagement, yet LinkedIn seems to have a better handle on monetization.

Where can LinkedIn go from here?
The last few years have been remarkable for LinkedIn. Heck, the past decade has been phenomenal. Nearly 10 years ago, LinkedIn was home to only 900,000 members, trailed leading social networks MySpace and Friendster, and had yet to pocket a single dollar in revenue.

How times have changed. Fast-forward nine years and LinkedIn's raking in hundreds of millions in revenue every quarter on the back of a diversified and profitable business model. A business model that looks increasingly better than Facebook's, in my opinion.

The company provided slightly lower guidance for the quarter ahead, to be sure, forecasting revenue of $415 million-$420 million. Analysts were targeting $438 million. This seems to be the reason for the sell-off after the earnings announcement. However, all things considered -- from membership to monetization -- LinkedIn's recent quarter was anything but lackluster. Investors who were waiting to buy LinkedIn on a dip might just want to pull the trigger.

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