LinkedIn: Sell-Off Makes Valuation Compelling

LinkedIn's recent sell-off points toward an opportunity.

Ishfaque Faruk
Ishfaque Faruk
Apr 14, 2014 at 10:30AM
Technology and Telecom

The broad pullback in the market has affected a number of technology stocks, including LinkedIn (NYSE:LNKD.DL). Shares of the professional networking site are down almost 100 points from its 52 week-highs. It's growing its revenue from online recruitment and is growing its user base across the globe, including key markets like China. The recent sell-off in LinkedIn might provide a compelling opportunity.

Robust growth
LinkedIn has seen stellar growth in its registered user base, which was in excess of 275 million users across the globe. The company's diversified revenue stream has been growing at a brisk pace. In 2013, the company's revenue increased 57% year over year to $1.53 billion. Its core talent solutions business grew at an even faster pace of 64% in the last year.

The talent solutions business made up 55% of the company's revenue in the last quarter, and has room to grow. LinkedIn's acquisition of Bright, will enable the company to utilize algorithmic matching of jobs with prospects, and should lead to higher engagement and growth in job listings by the company's corporate clients. LinkedIn's total corporate clients increased 49% year over year to 24,500 at the end of 2013, and has space to grow in the years ahead. 

Since growth is coming via mobile devices, the company's mobile positioning is critical for long-term sustainability. Roughly 41% of LinkedIn's unique visitors are flowing in from mobile devices. As a result, LinkedIn is gaining ground with mobile usage on social media giant, Facebook (NASDAQ:FB).

In the last quarter, Facebook saw 77% of its total user base of 1.23 billion coming in from mobile devices. And over time, LinkedIn's mobile viewership should ramp up and be closer to Facebook's total mobile usage. 

Plans to grow 
LinkedIn's revenue from marketing dollars are a mere fraction of its other social media counterparts, including Facebook and Twitter. And over time, the company is expected to earn a lot more sales from advertising dollars. In the last quarter, only 25% of its total revenue came from its marketing segments and this should scale up over time. 

The company has intensified its focus on content-marketing and intends to make its site a content platform. LinkedIn is investing heavily in R&D to come up with more innovative ways to monetize sponsored content. In the last quarter, sponsored-content made up 13% of total marketing revenue, and roughly two-thirds of its content revenue are coming from mobile devices. So growing more mobile usage will aid LinkedIn in monetizing its users through sponsored-content from its corporate clients. 

In addition, LinkedIn's potential remains untapped in major countries like China. The company's management stated that it has only 4 million users in China, and higher penetration levels in the Chinese market will not only translate into a much larger user base, but also aid in roping more corporate clients. 

The bottom line
The recent sell-off in LinkedIn was a factor of the broad market dip in Internet and technology names. In addition, the sell-off was fueled by the company's conservative guidance for the first quarter and full year 2014. LinkedIn's revenue guidance for 2014 pointed to a revenue growth rate of 34%, and this was a discouraging signal to many large institutional investors. However, the company has a record of giving conservative guidance and sell-side analysts know that. 

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The consensus revenue estimates for LinkedIn in 2014 stood at $2.11 billion among sell-side analysts, compared to the high-end of the company's revenue estimate of $2.05 billion. LinkedIn remains (in effect) a monopoly in the online recruitment business. The talent solutions business is well on its way to being a multi-billion dollar business, and its diversified revenue stream protects a large part of the downside risk.

LinkedIn trades at a cheaper P/S multiple relative to other social media names, including Facebook and Twitter.  The disproportionate fall in the stock price creates a compelling opportunity to accumulate shares.