This week's tech edition of Industry Focus offers a Good Cop/Bad Cop look at LinkedIn's (LNKD.DL) valuation and $30 billion market cap. Is the social networking giant insanely overvalued? Who would invest at a time like this? Tune in to hear both sides.
Next up, the Internet of Things is taking off, and InvenSense (INVN) is in the thick of it. Tapped to provide motion sensors for the iPhone 6, the gyroscope and accelerometer supplier had plenty of other applications on display at this year's Consumer Electronics Show.
A full transcript follows the video.
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Sean O'Reilly: We've got one company trying to connect workers with jobs, and another company trying to connect everything else. This is the tech edition of Industry Focus.
Greetings Fools! I am Sean O'Reilly at Fool Headquarters in tropical Alexandria, Virginia, here with the one and only Simon Erickson. How are you today, sir?
Simon Erickson: Tropical, indeed! I think it's about 19° outside right now.
O'Reilly: I'm being ironic.
Erickson: Indeed, yes! It's a pleasure to be part of the show here with you.
O'Reilly: Folks, if you are just joining us, we're going to talk about a deep dive into InvenSense, Internet of Things, a little bit of that today.
But first, I did want to cover LinkedIn's earnings because their stock is up 13-14% today, and that doesn't happen a lot. Real quick, I'm going to run down earnings then we'll talk about their valuation.
Erickson: Great. Looking forward to it!
O'Reilly: Revenue for the fourth quarter was $643 million, up a whopping 44% compared to last year. Not too bad. Not too shabby.
Net income on a GAAP basis -- which, any good analyst obviously gives a nod and a wink to any kind of GAAP earnings, especially with companies like this -- but $3 million compared to $4 million last year.
However, and this is probably more important as I'm sure we'll talk about, non-GAAP net income for the fourth quarter was $77 million, compared with $48 million over last year. This thing is at 125 times non-GAAP earnings. What's going on here?
Erickson: First of all, let's talk about what LinkedIn is doing, because this is a very interesting business. They're obviously thinking very big. Their goal is to get everyone in the world connected to the correct job for them.
O'Reilly: Eight billion people, all connected on LinkedIn.
Erickson: On LinkedIn. Using LinkedIn, getting the global workforce into the right job. They've invested very heavily to do that. That's not just a pipe dream for this company.
O'Reilly: They're not doing too bad here in the United States, because they say they've got about 300 million members and the U.S. population is only 300 million, so they're moving right along there.
Erickson: 347 million members. That's up 25% year over year, and 93 million of those use it at least monthly, so they've got this ambitious goal; they've actually shown some real success in getting people signed on.
Interestingly also, Sean, 75% of the page views of LinkedIn, people that are using the site, are coming from outside the United States, and 50% are coming from mobile devices. LinkedIn knows where people are connecting from. They're targeting the right people out there.
O'Reilly: What other countries are they big in?
Erickson: China is really big for LinkedIn right now -- Simplified Chinese -- they've modified the site to a different language to appeal to that market, too. In fact, all of Asia is actually growing very well for them right now.
O'Reilly: Do they have any competition over there at all?
Erickson: They do. There's a lot of fragmented companies that are trying to get the Chinese workforce into the right job, and stuff like that.
But LinkedIn, this is a network effect kind of business. If you're looking for a job, you don't want to go to a smaller one that might have a couple of job listings, like your local paper. You want to go to LinkedIn, where everyone else is listing their jobs. That's why I think that their ambitions are good ones. You really want scale in an industry like this.
O'Reilly: For sure. I did want to talk about the Internet of Things, but let's just talk real quick about LinkedIn's valuation. Just rough back-of-the-envelope math here, it's at 125 times non-GAAP earnings, its market cap's $30 billion on today's rise.
Show me the Excel spreadsheet that has the discounted present value equating to $30 billion. What makes this a Buy right now?
Erickson: Sean, I'm going to have to play Good Cop to the Bad Cop with you on this one, because this is a Rule Breakers recommendation. First of all, Rule Breakers looks for overvalued companies.
O'Reilly: Right.
Erickson: It's one of the signs.
O'Reilly: That's one of David Gardner's -- our co-founder's -- tenets is if everybody thinks it's overvalued, you've got to do what other people aren't doing, so there's that.
Erickson: One of the six signs of Rule Breakers is look for companies that are overvalued. We think that that keeps a lot of investors out until the stock continues to show really good metrics over time, and then they ease up and say, "You know, I was wrong before. We're going to get into a company like this."
O'Reilly: Right.
Erickson: LinkedIn's no different. I'm going to throw some statistics at you, why I don't think it's overvalued right now, even as a $33 billion company.
Their Talent Solutions Group appeals to recruiters. They're doing about $1 billion in this business today. This is recruiters finding the right person for the job. They subscribe through a subscription to LinkedIn, and then they place those people in the jobs as well. LinkedIn thinks that that is easily already a $10 billion opportunity, for that business right there.
Then the other one we've talked a little bit about before is the Marketing Solutions side of the business. This competes with Facebook (META -4.13%) for those sponsored links that you see on the newsfeed of LinkedIn.
O'Reilly: Oh, man.
Erickson: A lot of people have said Facebook is getting into Facebook at Work, they're getting a more professional focus right now. A lot of people are saying that Facebook is a LinkedIn killer for advertising.
O'Reilly: I will grant you that I don't buy that. I really don't. If I'm looking for a job, I want something more professional, not how I connect with my family and friends, with pictures of my son.
Erickson: And advertisers agree with you. The number of sponsored links on LinkedIn is up 3x over last year, and the price per update of those is up 40%, so I would dispute ...
O'Reilly: They're doing all right.
Erickson: Yes. My bigger point is that it's easy to say, looking at today's metrics, it does look overvalued. We like that because we see the bigger opportunity and we see a business with really good leadership, investing in itself, and going for the bigger picture.
O'Reilly: Very good.
Erickson: We really like LinkedIn, longer-term.
O'Reilly: Cool. All right, good stuff.
Erickson: Thank you.
O'Reilly: Moving on, we wanted to talk about Internet of Things, specifically InvenSense. We'll probably be talking about a little CalAmp (CAMP 2.75%) next week, and all that.
First and foremost, I want to talk about the fact that they're in the new iPhone 6. Apple (AAPL -1.22%) is notorious with ... squeezing their suppliers, we'll say. Is the fact that they're in the iPhone 6 actually a negative?
Erickson: I wouldn't bet the farm on InvenSense making a lot of money off of Apple. I think the average selling prices for a big customer like an Apple are going to be lower than the rest of the market. There's no disputing that.
But on the other hand, this is all incremental revenue. Keep in mind, Apple was not even a customer two quarters ago, and now they're 45% of sales.
O'Reilly: Jeez! That makes sense because 50 million iPhones get sold. Real quick, just taking a step back, InvenSense obviously just makes little gyroscopes that make flipping your screen on your phone work, and all that.
Erickson: Yes.
O'Reilly: For our listeners, the average price of these things is like $3, right?
Erickson: It depends on the sensor, but I don't think that's egregious to say.
O'Reilly: All right, so they're selling millions upon millions of these little gyroscopes. They're easily the most advanced thing on the market. That's why Apple chose them, and that's actually why you think it's good that they're in Apple, if just from a market perception standpoint.
Erickson: Oh, yes. If you're working with Apple and you've got the validity of saying, "These are the guys who are supplying the Apple iPhone 6, the Samsung Galaxy phones," you've got immediately credibility that you're a great vendor for a motion sensor like that.
O'Reilly: Right. "If you're good enough for Apple, you're good enough for me."
Erickson: I think that's one of the parts of the thesis for this, is the new applications. We're looking at smartphones today, but let's look at some of the new stuff that's using motion sensors right now. Optical image stabilization. That's when you're taking pictures with your phone ...
O'Reilly: Say that five times fast!
Erickson: OIS. I'll call it OIS! If you've got a shaky hand when you're taking pictures, you don't want a blurry picture. It's only in 10% of previous smartphones.
O'Reilly: My selfie stick's a little shaky.
Erickson: Selfie stick. You can stabilize that with an OIS, and InvenSense sells the motion sensors that go into that. They expect the uptake of that to double by the end of the calendar year.
O'Reilly: Did you see that in CES? Where did you see that?
Erickson: Yes, they were all over the place in CES. We went to the Consumer Electronics Show in Las Vegas, which was in January. There were a lot of panels, a lot of booths, a lot of companies focused on wearables and Internet of Things, and these new connected wirelessly devices that are going to be all over the place.
O'Reilly: You saw a guy in a suit with InvenSense products.
Erickson: People were wearing suits. People were wearing virtual reality suits, where they've actually got InvenSense's sensors in the shoes that they're walking around in.
But the thing that was very interesting to me was we did a channel check, if you will, Sean. We spot-checked. We talked with a lot of different customers out there and we asked them who they were working with for the sensors.
O'Reilly: All of them said ...
Erickson: A lot of them were working with InvenSense. I think it was from big smartphone companies to the smallest drone manufacturer out there. I think InvenSense is onto something here. They're not just selling the sensors. They're selling the software and the turnkey solutions.
O'Reilly: Which is arguably where the money might be at.
Erickson: If you're a developer and you want to come up with something that's motion-based, you want to work with InvenSense because they're going to get it done for you.
O'Reilly: You want a solution that's quick and easy and bing-bang-boom.
Erickson: Good for a customer, and good for InvenSense, for margins. I like the long term plan that they have for this.
O'Reilly: What's InvenSense doing for my house?
Erickson: Ah, yes! Smart home applications is a newer thing that they're working on too. TVs is the first thing that they're working on. When you stand up and go to get popcorn in the middle of the movie, the TV recognizes ...
O'Reilly: You know what I did last night. That's exactly what I did.
Erickson: Well, InvenSense knows. They told me. They have a motion sensor that can figure out you're standing up, you're walking away, you're not in front of the TV anymore. You can actually move your hands and do gestures to stop, to play, to fast forward.
O'Reilly: If I wave at the TV, it'll turn it off or pause it or something?
Erickson: That's right.
O'Reilly: Wow, OK. All right, I'm totally in!
Erickson: Cool stuff!
O'Reilly: Anything else that InvenSense has coming around the corner?
Erickson: Health and fitness, this is kind of interesting. They're putting their chips ... I'm sorry, I keep saying "chips." InvenSense has got their accelerometers and gyrometers into tennis rackets to improve your swing.
O'Reilly: Imagine what the Williams sisters could have done.
Erickson: Even better. They could be even better from these things. That's one of the things. Virtual reality I think is really still considered to be futuristic, but we saw a lot of that at CES too, and I'm really looking forward to seeing where that goes in the next couple of years as well.
O'Reilly: Very cool. All right. Simon, thank you for your time. I am Sean O'Reilly, from Fool Headquarters in Alexandria, Virginia. Have a great day, Fools!
