LinkedIn: A Buying Opportunity on the Dip?

Weakness in LinkedIn's stock price creates a buying opportunity.

Apr 3, 2014 at 2:30PM

The professional networking giant LinkedIn (NYSE:LNKD) is growing rapidly and now has more than 277 million members across the globe, which marks a 37% year-over-year increase. Professionals outside the U.S. now make up 66% of LinkedIn's total membership count, which shows the company's global nature.

Total addressable market
Due to its smaller size, LinkedIn has much more room to grow relative to social media giant Facebook (NASDAQ:FB), and more diverse revenue streams as well. Since there are 3 billion members of the global workforce, LinkedIn's user base can grow exponentially in the future.

Facebook already has 1.23 billion monthly users, but is planning to grow Internet usage in under-penetrated regions across the globe with initiatives like Internet.org, which will bear fruit for all Internet companies in the long run. 

LinkedIn stated that there are now more than 3.5 million active company pages on its network, so the company has much more growth room for corporate customers and sponsored marketing clients. The market for staffing and jobs is a $27 billion market, so LinkedIn can service a substantial portion of this total addressable market.

To this end, LinkedIn is making a big push for growing its sales, as evidenced by the huge increase in sales reps in 2013. These heavy investments shrunk the company's operating margin to 3% in 2013, from almost 6% in 2012. LinkedIn has only 4 million users in China, and the company intends to ramp that up substantially in the next few years. LinkedIn did a follow-on equity offering in 2013, and now has $2.3 billion of cash in its balance sheet to fund future investments in R&D and acquisitions. 

Strong metrics
LinkedIn's customer engagement levels have seen stellar increases as more of its registered members are coming back to the platform to engage with various forms of content. According to comScore data, the combined monthly active user base of LinkedIn and SlideShare stood at 187 million in the last quarter, excluding mobile. The company has seen its mobile usage increase as well; in the last quarter, 41% of its total unique users came from mobile devices. 

LinkedIn revenue for 2013 stood at $1.53 billion, a 57% year-over-year increase, and GAAP EPS increased 18% to $0.23, which would have been much higher if the company hadn't been investing heavily for future growth. The company's operating cash flow increased 63% to $436 million, and free cash flow stood at $159 million in 2013. The company's revenue base is well-rounded, as it gets 61% of its revenue from the U.S. and the rest from across the globe. 

Segment revenue growth
The company's talent solutions business grew 53% year-over-year to $246 million in the last quarter and made up 55% of total LinkedIn revenue. Marketing solutions revenue increased 36% year-over-year to $114 million. Revenue from marketing made up 25% of total LinkedIn revenue in the holiday quarter. Premium subscription products grew a healthy 48% year-over-year to $88 million and made up 20% of LinkedIn revenue in the last quarter.

Since most of LinkedIn's revenue is from subscription products, the company's deferred revenue provides a good snapshot of future revenue. At the end of 2013, LinkedIn's deferred revenue stood at $392 million. The company finished off 2013 with 24,500 corporate customers, which is a 49% increase from year-end 2012. A larger base of corporate customers will provide substantial tailwind for LinkedIn's future revenue growth and free cash flow. 

The company recently disclosed the acquisition of Bright for $120 million, with 27% of the price tag in cash and the rest in stock. Bright utilizes data and relevance algorithms to match employers and job prospects and would be a great tool for growing LinkedIn's talent solutions business. In addition, the company has increased its efforts to be a larger marketing-focused firm. In the last quarter, the company stated that its sponsored updates are doing well, and it now has 2,000 customers for sponsored content and updates. Two-thirds of sponsored marketing revenue comes from mobile devices, which is a great plus for the company. 

Going forward
LinkedIn expects 2014 to be in the range of $2.02 billion-$2.05 billion. The revenue guidance of $2.05 billion implies a 34% increase, which is a sizable decline in revenue growth from the company's 2013 growth rate of 57%. Some investors might have been spooked by the slowdown in revenue growth of its talent solutions business, which might have sparked the sell-off. The underperformance in LinkedIn shares creates a buying opportunity as the company reaches higher user penetration rates and grows its corporate clientele. 

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Ishfaque Faruk owns shares of Facebook. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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