Source: LinkedIn.
If you look at the three big names in social media, two of them are trading at fresh 52-week lows and appear poised to keep heading lower. LinkedIn (LNKD +0.00%) and Twitter (TWTR +0.00%) were both slammed following their last respective earnings releases, getting punished even more as the broader market experiences a brutal sell-off. Twitter's weakness comes as it continues to stall in user growth while management bluntly acknowledged the core product's shortcomings. Meanwhile, LinkedIn investors weren't impressed with last quarter, fearing that the professional networker's display ad business is struggling.
There have been a couple of comparisons of the two companies making the rounds recently. Are these comparisons valid?
Who needs display ad revenue?
Evercore ISI downgraded LinkedIn after the release to "hold," saying that LinkedIn's slowing user growth is similar to Twitter's current predicament. Evercore points to the anemic sequential growth in unique visitors. For context, that figure climbed just 0.4% to 97.3 million sequentially. Much like Twitter, this presents obvious monetization challenges, at least to the extent that the company monetizes through ads. If traffic slows, it can either raise ad prices or increase its ad load.
These fears aren't entirely justified, though. While LinkedIn's display ad business is undoubtedly shrinking, this is an entirely planned transition away from display ads. Here's CFO Steven Sordello on the call:
Display revenue continued to decline, decreasing approximately 30% year-over-year versus a 10% decline in the first quarter. Our investment continues to move away from display and toward product areas that best leverage our unique data assets to maximize member experience and customer ROI. As a result, we continue to shift our portfolio toward native content marketing and lead generation.
Plus, display ads represent just 3% of overall revenue, and display ad revenue isn't particularly high-quality revenue compared to LinkedIn's actual core business (Talent Solutions). LinkedIn has been working hard to ramp up Sponsored Content, which is growing quite nicely and now comprises nearly half of Marketing Solutions revenue.
Source: SEC filings.
In my opinion, LinkedIn's lack of reliance on display advertising is a competitive strength, so the declining display ad revenue doesn't bother me one bit.
How worrisome is falling engagement?
Just last week, the Pew Research Center released some estimates on domestic usage of social media sites. Of the five major platforms measured, LinkedIn and Twitter were the only two that were either flat or declining, a fact that Business Insider picked up on. This table represents the percentage of U.S. online adults that use each platform (sample size of about 1,900).
|
Platform |
2012 |
2013 |
2014 |
2015 |
|---|---|---|---|---|
|
|
20% |
22% |
28% |
25% |
|
|
16% |
18% |
23% |
23% |
Source: Pew Research Center.
This is another example of the challenges that third-party researchers face when extrapolating relatively small (albeit statistically significant) sample sizes over very large populations. Even within the U.S., LinkedIn's official metrics show that the number of registered members in the U.S. jumped by 15% last quarter to over 119 million. Registered members aren't a measure of engagement, which is what Pew is trying to gauge, and LinkedIn doesn't break down its traffic figures by geography.
On top of that, looking only within the U.S. ignores many of LinkedIn's international opportunities. Its registered member base in China has now grown to 10 million, up from 4 million in February 2014. China is now LinkedIn's second-largest market for new members behind the U.S.
Perhaps more importantly, we come back to the fact that LinkedIn's core business is its Talent Solutions segment. Of course, LinkedIn wants to grow engagement just like any other social network, but, at a bare minimum, LinkedIn's core business only requires that members keep their profile information and data current, which feed the Talent Solutions business. That's a pretty low hurdle. Even if engagement plateaus, LinkedIn is still much safer than its peers.
It should get better from here
In many ways, 2015 has been a year of transition for LinkedIn. The company still intends to build its third self-managed data center this year as part of a long-term strategy to reduce operating expenses by 50% per data center. The acquisition of Lynda.com also hurt EBITDA margins this year, but next year profitability should bounce back as the integration continues and course availability expands.
JPMorgan sees positive catalysts coming in 2016, while RBC thinks LinkedIn presents one of the best risk-reward opportunities among big Internet names. While LinkedIn and Twitter are both at lows, one of these is not like the other.
