LinkedIn(NYSE:LNKD.DL) sells at a much cheaper price relative to its recent highs. The professional networking giant has a very strong core business and one that is expected to grow significantly in the future. Here are three reasons why LinkedIn is a buy. The company has a large addressable market in the online recruiting business, it is the category leader in the space and its valuation is attractive and has a lot of room for upside going forward.
Ahead of the pack
LinkedIn is the category leader not only in the professional networking space but also in the online recruitment business. The company has already more than 300 million registered users, and has more than 186 million monthly active users taking both LinkedIn and SlideShare into account.
And the company has a lot more for room for user penetration not only in the U.S but also worldwide. According to eMarketer, LinkedIn has roughly 40 million users in Latin America. However, eMarketer estimates that there will be 222 million social network users in that region or 37% of the regional population. Accordingly, there is a lot of room for LinkedIn to grow its user penetration.
In addition, LinkedIn can operate in China and this luxury is not available to its social media peer, Facebook(NASDAQ:FB). China has the largest Internet connected population in the world with 642 million online users, and LinkedIn can grow its penetration in that region significantly with more marketing. Facebook already has 1.3 billion users, but the company is missing out on more than 20% of the world's Internet population due to restrictions in China. LinkedIn doesn't face that headwind.
Large Addressable Market
LinkedIn has previously pointed to a total addressable market of around $27 billion in the worldwide online recruitment business. LinkedIn's revenues in the last twelve months from this hiring segment stood at roughly $951 million, which leaves significant growth room from this crucial category.
In addition, there aren't too many overly formidable competitors in the space and its existing competitors are getting weaker. Monster Worldwide (NYSE:MWW) saw its revenues decline 7% in the last quarter, while its earnings per share declined more than 50%. Monster has been looking for a buyer for a long-time, but found very limited interest. With its rivals weakening in a very competitive environment, LinkedIn can grab more market share from other online recruiting portals.
Valuation is more attractive
The large pullback in LinkedIn's stock price in the last few months has made the company's stock price far more attractive. The company currently trades at 7.1 times its expected 2015 sales estimates of $2.82 billion, and that valuation multiple should notch up over time.
In addition, since a large part of LinkedIn's revenues come from relatively stable subscription dollars, the revenue estimates of the company are a lot more predictable and more accurate, compared to an advertising-based company like Facebook which has the probability of seeing lumpy revenues.
So the 2015 revenue estimates by sell-side analysts are likely to be pretty accurate and not fall-off the mark by a sizable distance. LinkedIn is attractively priced at the moment relative to its long-term prospects. LinkedIn swung to a net loss of $13.3 million in the last quarter due to big investments in the business, but more importantly, the company's operating cash flow increased 24% year-over-year to $129 million.
LinkedIn has a lot of advantages in terms of recruiting due to the network effects from its social network. The company should continue to see robust growth rates of more than 30% in the next few years, and the company should see growth in EPS after the recent dip that took place. LinkedIn's stock price has a lot of upside potential in the long-run.