It is entirely possible LinkedIn is the perfect model of what a modern internet based business should be. Amongst its listed peers, LinkedIn stands out for all the right reasons.
For one, it doesn’t have an excessive reliance on any single revenue stream. LinkedIn is seeing solid growth across its three main areas – display and brand advertising, subscriptions and employment classified advertising revenue. 86 per cent revenue growth in calendar 2012 saw revenues increase to $972 million.
It does beg the question how a company with $927 million in annual revenue and $56 million in operating income can valued at $13.3 billion, with a price earnings (P/E) of over 800; but in the world of publicly listed tech stocks it is smarter to look at business performance rather than market cap to get an accurate handle of its value. After all, if LinkedIn was trading at the same P/E as Google (23.8x) it would have a market cap of $1.35 billion, around 10 per cent of its current value.
Analysts are comfortable with LinkedIn’s current stock price as they clearly see big potential within the business. We look at the key areas to continue to monitor within LinkedIn
Usage numbers continue to increase
Average monthly visitors for 2012 were up 39 per cent to 201.9 million according to Comscore, up from 145 million in 2011. A key driver of this is LinkedIn’s continued emphasis on content. Well – not content creation – but content aggregation. LinkedIn is now offering users content ‘tailored for them’. In doing so it is giving users a digest of content from around the web relevant to their profession and skill sets. It’s a smart strategy as it increases site visitation yet doesn’t incur any of the cost generally associated with creating content.
The masterstroke is that most of the content is coming from high–end business and professional sites, the same sites competing with LinkedIn for display advertising revenue. The benefit for LinkedIn is this user engagement they can monetise in numerous ways – display advertising, subscriptions and classified ads. Product development is critical for LinkedIn if it is to continue to position itself as a professional network users need to visit every week. Unlike a business like Seek, which one would only visit if s/he was in the market for a new role, LinkedIn wants to position as a professional network that is a resource for one look to develop their career – which means as a product it needs to offer value to its users. Product development costs were up 95 per cent in 2012.
Marketing solutions growth is crushing the rest of the market
Marketing solutions is LinkedIn’s term for display advertising – and it’s growing at phenomenal rates, 66 per cent to $258 million in 2012. Whilst this growth is impressive, global display advertising revenues of $258 million suggest that LinkedIn has a lot of growth still to explore in this area. The global opportunity for LinkedIn within premium display advertising is north of $1 billion, so expect LinkedIn to continue strong growth in this area as it continues to develop its ad products, targeting and most importantly, sales teams.
The advertising market for the high net worth professional has remained relatively immune from the global slowdown in the overall ad market. Sales are crucial for LinkedIn, it doubled its sales and marketing spend in 2012 to $324 million.
APAC growth is impressive
LinkedIn saw excellent growth from the APAC region in 2012. Revenue was up 135 per cent to $69.4 million, outperforming growth rates in all other regions. This is especially impressive considering in 2010 the business generated $9.2 million in revenue within the region.
The business is most active within the key Melbourne and Sydney markets, beefing up sales presence within hiring solutions and marketing solutions, putting it in direct competition for revenue with the likes of Seek, MyCareer, The Australian and News Limited’s and Fairfax’s business titles.
Premium subscriptions continue to rise
Whilst media companies battle with the challenge of charging for content, LinkedIn continues to increase subscriptions to its premium products. Subscription revenue increased 81 per cent to $190 million in 2012. It is important to put this into perspective however, a LinkedIn subscription is, on average, north of $200 per annum. Considering this, LinkedIn only has around 1 million paying users out of a userbase of over 200 million per month.
If LinkedIn can increase its paid subscription ratio from 0.5 per cent to 2.5 per cent over the next 3 years, this would result in annual revenue of approximately $600 million from premium subscription alone. If 5 per cent of LinkedIn users were on some sort of premium payment product, the company would earn more than $1 billion from paid content alone. Even with a low percentage of paid/free users, LinkedIn still has more paying users than The New York Times has digital subscribers (640,000).
Talent solutions is the largest opportunity of all
Perhaps the strongest driver of LinkedIn’s share price is analyst expectations that LinkedIn can become the worldwide leader in the employment advertising market. Its Talent Solutions area has grown from $36 million in revenue in 2009 to $523.6 million in 2012 and is on the verge of becoming a $1 billion revenue stream in 2013.
And that’s just the start. If you look at a market like Australia, the dominant employment website is Seek. For FY12 Seek reported revenues for its domestic employment business of $247.8 million. Assuming LinkedIn’s Australian operations are in line with its overall operations, LinkedIn would have generated approximately $37 million from job ads within the APAC region in 2012. It is likely that LinkedIn’s job ad business is currently generating less than 10 per cent of the revenue Seek is achieving.
With over two million users a month, there is undoubtedly huge opportunity for LinkedIn to steal share from Seek and MyCareer over the next 24 months and become a $70 to $90 million area for LinkedIn in Australia alone.
LinkedIn has the same potential to dramatically disrupt market leaders such as Monster in the US, Reed Jobs in the UK and Zhaopin in China.