2 Reasons to Add LinkedIn to Your Roth IRA

The Pencils IRA Project is dedicated to building a portfolio of promising businesses that can be followed and replicated by both young and new IRA investors. Each holding of the Pencils IRA Project must meet the five pillars of a "megagrower" business -- purpose-driven business, innovative products, visionary leadership, increasing cash-flow production, and strong company culture -- with significant potential to create stakeholder value and substantially beat the market over the long haul.

The second addition to my personal real-money Pencils IRA Project portfolio is LinkedIn (NYSE: LNKD  ) , the rapidly growing professional social-networking platform that is familiar to many college students and young adults. LinkedIn is quickly proving that its service entails much more than a place to stash a resume. Its average monthly number of unique visitors totaled 183 million in 2013, up 45% from 2012. Given Facebook's (NASDAQ: FB  ) 1.3 billion average active monthly users and Twitter's (NYSE: TWTR  ) 645 million registered users, LinkedIn still has plenty of room to expand as the world's largest social network for professionals. The company is also differentiating itself from other players in the job search and recruitment field, such as Monster Worldwide  (NYSE: MWW  ) . 

The company does quite well in my "megagrower pillars" evaluation and promises to reward patient long-term investors. Let's see how LinkedIn stacks up in my first two pillars -- I address the three remaining pillars in a follow-up article.

1. Purpose-driven business
"People matter." These are the words Reid Hoffman, LinkedIn's founder and chairman, uses to describe his interest in the social-media phenomenon and motivation to start LinkedIn. 

LinkedIn's purpose, in a nutshell, is to create economic opportunity for every professional in the world (3.3 billion individuals and counting). "I can't think of a more worthwhile purpose than investing in tools that create economic opportunity for people," says LinkedIn CEO Jeff Weiner. So far as purpose-driven businesses are concerned, LinkedIn is at the top of the list with its focus on utilizing social-media platforms to empower people economically worldwide.

2. Innovative products and services
LinkedIn has an expanding arsenal of social-networking products to serve a growing worldwide base of professionals. LinkedIn ended 2013 with 277 million registered members, adding 75 million members in 2013 alone (70% of those new members coming from outside the U.S.). The company's product offerings fall into three general categories: talent solutions, marketing solutions, and premium subscriptions.

LinkedIn's largest segment -- talent solutions -- saw revenue grow 64.19% in 2013 to $859.67 million. Talent solutions focuses on providing tools (such as Linkedin Recruiter) for professional organizations and enterprises to post jobs and recruit top talent from the job-seeking pool. Corporate customers under contract with LinkedIn grew 49% year over year in the fourth quarter of 2013 to 24,500.

In February, LinkedIn announced its $120 million acquisition of Bright, a company specializing in data insights and algorithms to help match prospective employers with job seekers. Eduardo Vivas, founder of Bright, shared his excitement about joining the LinkedIn team: 

Today, employers complain that there are no qualified applicants, yet qualified applicants often have their resumes overlooked. This marketplace inefficiency called for a technological solution and we resolved to heed that call. ... We decided to join LinkedIn because of what we lacked -- the ability to apply this technology across the entire economy. We share LinkedIn's passion for connecting talent with opportunity at massive scale. And we agree that the old models for online recruiting are hopelessly broken. 

Monster Worldwide also offers job searching and recruiting services to about  200 million registered members, but the company has struggled to compete with professional social-networking services like LinkedIn. Monster's 2013 10K says as much: "Professional networking websites have had significant success over the past several years in gaining large numbers of members and attracting employer customers with products that compete directly with our products." The fact that Monster's revenue has declined 18.7% since 2011, while LinkedIn's has increased 192.7% over the same period, serves as an indicator that professionals are drifting toward holistic social-networking platforms versus services that only focus on listing and seeking jobs. 

LinkedIn's marketing solutions segment's revenue grew 40.3% in 2013 to $362.4 million. This segment generates revenue primarily through outside advertisers and provides a new option for users to pay for "sponsored posts," similar to Facebook and Twitter. LinkedIn's premium subscriptions segment also saw impressive growth in 2013, with revenue increasing 60.9% to $306.5 million. 

2014 will bring the full unveiling of several new offerings from LinkedIn. The company's sales solutions segment -- a service for sales professionals to build connections, find leads, and shorten the "sales cycle" -- will become a core component of the business this year. LinkedIn's original content continues to find momentum through its Pulse professional news app (delivering personalized professional news to each user), a new publishing platform for members to publish original content through blogs on LinkedIn, and the company's "Influencers" program, where notable individuals (including Barack Obama, Bill Gates, and Motley Fool co-founder and CEO Tom Gardner) publish original articles on LinkedIn.

With an expanding arsenal of tools, LinkedIn is aiming, in the words of The Washington Post's Sarah Halzack, "to become the virtual town square for our professional lives." LinkedIn plowed $395.6 million -- that's 26% of the company's 2013 revenue -- into product development in 2013. Innovation is ingrained in LinkedIn's DNA, as evidenced by the company's global expansion into countries like China, its product development, and its ongoing expansion of recruiting services and capabilities. 

Foolish bottom line
Other social networks, such as Facebook and Twitter, are not specifically gearing themselves as avenues for professionals to engage in networking. Facebook and Twitter have undoubtedly positioned themselves incredibly well as leaders in the social-networking movement, but LinkedIn is masterfully positioning itself as the go-to network for worldwide professionals. Similarly, competitors such as Monster Worldwide are acknowledging that professionals are shifting from mere job search and recruitment services to holistic professional social networks like LinkedIn.

For these reasons, as well the three remaining megagrower pillars, examined in my next article, I am excited to add LinkedIn to the Pencils IRA Project.

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Read/Post Comments (5) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 17, 2014, at 10:56 AM, SocialMedianDown wrote:

    Are you out of your mind or you would like to pump up and dump it?

  • Report this Comment On March 17, 2014, at 11:44 AM, Pkylie wrote:

    Of course, it's yet another Pump N Dump from MF.

    You wonder how much Lnkd is paying MF to Pump non-stop the biggest SPAM company out there.

    The author must be a genius , if he thinks he knows more than insiders who are dumping every week non-stop . You didn't see this behavior at Msft, Goog, Oracle, etc from the insiders . WHY ? Because LNKD insiders know it's a PONZI scheme.

  • Report this Comment On March 17, 2014, at 12:04 PM, TMFPencils wrote:

    SocialMedianDown, I explore LinkedIn's valuation in more depth in the second piece to this article: http://www.fool.com/investing/general/2014/03/17/3-more-reas...

    Judging LinkedIn by its P/E ratio does not paint anything close to a full picture, because the company is funneling a large chunk of sales to product development. On a P/S basis, LinkedIn is much less expensive than Facebook and Twitter. LinkedIn continues to generate increasing amounts of free cash flow each quarter.

    The stock will be volatile, don't get me wrong, but the low EPS/high P/E is not a sufficient indicator of the cash that LinkedIn is generating. I am in for the long haul.

    Best,

    David K

  • Report this Comment On March 17, 2014, at 12:38 PM, MAReader wrote:

    Where is the link to your first recommendation? I'm getting in late on this project.

  • Report this Comment On March 17, 2014, at 1:06 PM, TMFPencils wrote:

    Hi MAReader,

    My first addition to this project was Stamps.com (STMP): http://www.fool.com/investing/general/2014/03/01/stampscom.a...

    Stamps.com is a more obscure business, but they will be an interesting one to follow over the next several years. Of course, my goal with this project is to build a well-rounded and diversified portfolio of promising businesses to hold for the long haul. I am not "betting big" on one stock or another.

    Thanks for your interest! Let me know if you have any other questions.

    David K

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