LinkedIn (NYSE:LNKD.DL) is clearly firing on all cylinders. The stock has almost doubled from its lows of the last year, and is trading near historical highs in the neighborhood of $265 per share. Let's take a look at why LinkedIn stock is doing so well, and more importantly, why it still offers a lot of upside potential in the years ahead.
A compelling business model
Wall Street analysts and media outlets usually consider LinkedIn a more professionally oriented version of Twitter (NYSE:TWTR) and Facebook (NASDAQ:FB). However, there are some major differences between LinkedIn and its peers, not only when it comes to target audience and company mission, but also regarding business model.
Both Facebook and Twitter rely heavily on online advertising for their revenues. While LinkedIn has a sizable presence in this business, the company makes most of its sales from services and subscriptions sold to companies and premium users.
The talent solutions segment consists of recruiters and hiring companies who pay LinkedIn to have access to potential job candidates; this segment produced 57% of total revenues during the last quarter. Premium subscriptions offer different plans for LinkedIn members to upgrade the service. It offers tools to enhance job search, sales, or networking capabilities, and it produced 19% of sales during the period. Marketing solutions is basically online advertising, which brought in 24% of total revenues during the last quarter.
Online advertising is a remarkably exciting business, however, companies like Facebook and Twitter need to compete against a global juggernaut such as Google (NASDAQ:GOOG) (NASDAQ:GOOGL) for ad dollars. There will most likely be enough room for many different players to grow and thrive in the industry over the decades ahead, but it's hard to tell what could happen to ad prices and company-level profitability in such an aggressively competitive environment.
LinkedIn, on the other hand, is the undisputed top player in online professional contacts and recruiting. The company has the first-mover advantage in the business, and the network effect is a powerful source of self-sustaining competitive strength. A growing population of users and recruiting companies makes the platform more valuable to both parties, so LinkedIn becomes more influential and effective as it grows in size over time.
By the numbers
As of the fourth quarter of 2014, LinkedIn has 347 million registered users, a year over year increase of 25%. Unique page views grew 34% during the quarter, well ahead of membership count, which is reflecting increasing engagement from members. Corporate solution customers grew 38% versus the same quarter in the prior year to 33,271 accounts. When it comes to size and staying power, LinkedIn has clearly gone through the inflection point.
Total sales during 2014 grew by an impressive 45% to $2.2 billion. All of LinkedIn's three business segments grew at above 40% during the year, proving that the company's different growth engines are running at full speed. Sales in talent solutions grew 46%, and so did marketing solution revenues, while premium subscription sales increased 42% over the year.
Not only are revenues rapidly growing, but profit margins are also consistently on the rise. Adjusted EBITDA margin was at 28% of revenues during the fourth quarter of 2014, a considerable increase versus 25% of sales in the same period during 2013. Growing sales and expanding profit margins should provide a double boost to earnings growth for investors in LinkedIn over the years ahead.
Management believes the company still has enormous room for expansion, as its ultimate potential market is the entire global workforce, comprised of nearly 3 billion people. In the words of CEO Jeff Weiner:
LinkedIn creates value for members by connecting them to the people, knowledge, and opportunities that matter most to them professionally. Today, we do this for nearly one-half of the world's professionals and students. Yet, our vision is to create economic opportunity for every member of the global workforce, all 3 billion of them.
Because of their different strategies and business models, among other things, companies such as LinkedIn, Facebook, and Twitter are not directly comparable. However, it's worth noting that LinkedIn stock looks attractively valued in comparison to both Facebook and Twitter. LinkedIn trades at a price to sales ratio of 15, below Facebook's price to sales ratio of 17 and Twitter's valuation of 22 times sales.
In a nutshell, considering LinkedIn's attractive business model, rock-solid performance, and enormous potential for growth, chances are, the company will continue making new highs over the coming years.