LinkedIn (LNKD +0.00%) stock is on a tailspin lately, accumulating a loss of more than 35% from its highs of the last year. Believing the decline was presenting an opportunity, I added to my LinkedIn position a couple of weeks ago. Things did not go as expected since then. The general market has been remarkably weak due to concerns over the economy in China, and LinkedIn stock continued falling to record lows for the year in the neighborhood of $175 per share currently.
Putting too much attention on short-term price fluctuations is generally a bad idea, but it does make sense to review an investing thesis from time to time, especially when prices are moving against your position. With this in mind, let's take a look at why I recently bought more LinkedIn stock.
A promising growth business
Unlike other companies in the social media business, which broadly depend on online advertising for most of their revenues, LinkedIn has a diversified business model. Besides, with practically no relevant competition in its main business, the company is the undisputed global leader in professional contacts and online recruiting.
LinkedIn has the first-mover advantage in the industry, and the network effect means that the platform becomes more valuable as it grows in size over time. Companies and individual users want to go to a platform offering the most opportunities for business relationships and new jobs, and this provides a self-sustaining virtuous cycle of growth and increased competitive strength for LinkedIn.
The company ended the second quarter of 2015 with 380 million members, an increase of 21% year over year. Page views grew 35% versus the second quarter in 2014, so engagement trends look encouragingly healthy. LinkedIn has 37,425 companies using its services as of the last quarter, an increase of 33% from the same period last year.
Source: LinkedIn.
These statistics show that LinkedIn is well past the inflection point when it comes to validating its customer proposition and consolidating its market leadership in online professional contacts and human resources.
Rapidly growing revenue
Total sales for the second quarter of 2015 jumped by a vigorous 33% to $312 million. Importantly, LinkedIn's multiple growth engines are all doing quite well.
The talent-solutions segment consists of recruiters and hiring companies that pay LinkedIn to view and contact job candidates; this is the biggest segment, as it brings in nearly 62% of sales. Revenue from talent solutions grew by a remarkable 38% last quarter.
LinkedIn members can opt-in to premium subscriptions to upgrade the service. This segment accounts for 18% of sales, and it delivered a year over year increase in revenue of 22% last quarter. Marketing solutions is basically online advertising, and the business produces 20% of total revenue, with sales from this segment increasing 32% during the second quarter of 2015.
Management estimates that the total addressable market for LinkedIn could be worth around $115 billion in the long term. This provides enormous room for growth for a company that is expected to generate nearly $2.9 billion in total sales in 2015.
On risk and opportunity
LinkedIn is in heavy reinvestment mode, and recent acquisitions such as Lynda.com are hurting profit margins. This means that, in spite of the rapidly growing sales, LinkedIn lost money on a net income level during the first half of 2015. Operating cash flows are firmly positive over the last several quarters, so the business remains healthy from a financial point of view. On the other hand, Wall Street tends to put a lot of attention on official earnings numbers, so the stock could remain volatile until accounting figures improve.
Over the long term, however, LinkedIn has enormous room for growth, and reinvestment needs should decline as the company matures over the years. It's hard to tell how long it may take for profit margins to improve, but as long as the business keeps moving in the right direction, it should be only a matter of time until LinkedIn starts translating its growing sales into expanding margins.
Short-term uncertainty usually creates opportunities for long-term investors, and this seems to be clearly the case when it comes to LinkedIn. For this reason, I'm planning to hold on to LinkedIn for years to come, and I may even continue adding to my position if weak stock prices provide additional opportunities down the road.
