Each dollar investors plowed into LinkedIn (NYSE:LNKD.DL) on its IPO is now worth $4.77. LinkedIn's ride has been lucrative, but it may be coming to a halt. After releasing its third-quarter results and announcing its fourth-quarter projections, LinkedIn saw its share price fall by a whopping 9.3%. At first glance, this number is surprising considering the company exceeded its third-quarter expectations. Upon closer inspection, however, some investors are realizing that LinkedIn faces a few major challenges that could pose a serious threat to continued growth.
Stagnating revenue model
The first of these challenges is LinkedIn's revenue model. Currently, the organization has a mixed revenue model, bringing in money through three different mediums: Talent Solutions, Marketing Solutions, and Premium Subscriptions. As seen below, third quarter income from Talent Solutions represented 57% of LinkedIn's total third-quarter revenue. Subsequently, Premium Subscription dollars made up 20%. Only 23% of LinkedIn's third-quarter revenue came from advertising, a 2% decrease from the third quarter of 2012.
These numbers are a source of concern because LinkedIn recently announced it saturated the white-collar market. If this is true, the 77% percent of revenues derived from Talent Solutions and Premium Subscription channels will likely stagnate as the majority of users utilizing these platforms fall within the white-collar demographic.
To maintain its steady growth, LinkedIn must compensate for this stagnating revenue by increasing its emphasis on Marketing Solutions. Consider other major social networks like Facebook (NASDAQ:FB). In the third quarter alone, Facebook generated $1.8 billion in advertising revenue. With a user base of over 1.11 billion, the company generated approximately $1.62 per user simply by selling ads. An impressive 49% of this advertising revenue came from mobile ads, up from 41% last quarter. In a world with ever increasing mobile usage, this is exciting news for Facebook investors as it indicates the organization is effectively becoming a "mobile-first" company.
Conversely, LinkedIn posted only $88.5 million in advertising revenue in quarter three. With a user base of about 259 million, the site made only $0.34 per user in quarter three through the sale of advertisements. If LinkedIn can effectively close this $1.28 per user gap, it will be in a better position to meet expectations. Until it does so, however, pro formas will likely continue to disappoint.
The multitude of new start-ups focused on taking some of LinkedIn's market share pose another threat to the LinkedIn. One such start-up is The Muse, an online network created to connect people seeking jobs with those offering them. Although this sounds far from novel, The Muse tackles the problem in a new way, leveraging employee testimonials, corporate culture, and pictures as a way for companies to attract interested employees. In essence, the site allows organizations to hire based on the promise of an environment rather than the promise of a specific job description, a concept that has investors enthused.
Fresh out of the Y-Combinator Accelerator program in Palo Alto, CA, the Muse has already raised $1.24 million in capital and placed third in Wall Street Journal's start-up of the year competition. It’s easy to use and aesthetically pleasing interface offers a completely unique job-hunting experience. Further, the Muse boasts more than 100 major clients including McKinsey & Co., AOL, and Intel, among others. With its emphasis on aesthetics and ease of use, The Muse just might be the Facebook to knock off the Myspace that is LinkedIn.
Why investors should care
LinkedIn has been a high flying stock. It's facing turbulence, and if its internal and external components are not properly addressed, it may begin to decline...even crash. Although not yet plummeting, the company needs to adapt else its days as a success story may come to a bitter end.
Fool contributor Scott Inderbitzen has no position in any stocks mentioned. 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.