john@johnducas.com

____________________

LinkedIn: Time to Get Back In

LinkedIn is one of the greatest social networks of our generation. Its strength and uniqueness relies on the fact that it caters only to professionals; people who are prepared to spend money in order to expand their network. This is the main premise behind LinkedIn’s recent expansion attempts. The company has been investing heavily towards the future and is what will create a robust and successful year for the social network.

 

The first half of the year for LinkedIn’s stock was rough to say the least. While the overall tech sector advanced over 10% YTD, LinkedIn experienced a 24% plunge from its initial share price of $221. The main reasons for this decline can be attributed to the company’s weak fundamentals paired with irrational behavior that led up to the high. At these levels, LinkedIn is very attractive in terms of future growth prospects.

 

Screen Shot 2014-07-20 at 17.20.18
 

 

Fundamentals

 

It is hard to talk about the Price to Earnings ratio of a high growth company like LinkedIn. A more appropriate metric would be to look at the Price/Earnings to Growth (PEG), which consequently translates into P/E over time. In this case LinkedIn’s PEG tells us that the stock is overvalued relative to both its industry as well as its sector. However, it is undervalued in relation to the overall S&P. Next year, analysts are anticipating for the company to increase its EPS, which will be more relevant when looking at valuation.

 

Screen Shot 2014-07-20 at 16.56.16

 

 

On the revenue front, LinkedIn has had extremely strong growth over the past 4 years. Currently the company’s market capitalization stands at $19.30 billion. Strong investment towards the future will ensure that the firm continues to grow at such a pace. This investment can be seen when taking a look at the company’s current assets to liabilities as shown below. With assets that make up more than 4 times the liabilities, LinkedIn is quite a solvent company.

Screen Shot 2014-07-20 at 16.55.37

(Source: YCharts)

 

In addition to its asset growth, it has also been taking on more debt (shown below). Accelerating asset and liability growth is a strong sign of a growth-oriented management. It is important to remember that LinkedIn is a software firm with only 5,400 employees, meaning that infrastructure costs are minimal. Therefore the piling liabilities point to increasing expenditures on marketing the service.

Screen Shot 2014-07-20 at 16.55.02

 

(Source YCharts)

 

 

A Look inside the Revenue Structure

 

LinkedIn has a very diverse set of revenue sources. The chart below highlights the major sources of revenue within LinkedIn.

Screen Shot 2014-07-20 at 17.16.18

 

(Source: ComScore, Statista)

 

One of the main revenue streams is through a paid subscription service that the company offers users in order to expand the features they are given. It also allows users to expand their network and make new connections. This is an essential feature that many users employ.

 

As can be seen, the largest source of revenue is through talent solutions. The company offers businesses, talent acquisition services by allowing them to use a plethora of metrics to screen different users by talent. This feature is extremely important towards LinkedIn core business and future advancement.

 

Screen Shot 2014-07-20 at 17.15.22As is the case with most technology companies, LinkedIn has a share of ad revenue within the industry. The chart shows the growth in ad revenue of the major social networks as a percent market share year-over-year. In comparison to the other companies, LinkedIn makes up a very small percent of the total ad revenue space. Nevertheless, it has shown major progress in increasing its market share. In 2012, it made up 0.4%, but in only 4 years, it has managed to double that figure to 0.8%. The past is certainly an indication of the future, and as the ad market continues to grow, so will LinkedIn’s share.

 

 

 

(Source: eMarketer.com)

 

 

Top & Bottom line Expansion

 

 

Ever since its IPO, LinkedIn has had tremendous top line growth. It advanced over 85% in 2012 and attained the $970 million mark. It continued its increase to $1.5 billion in 2013 by growing over 56%. According to Yahoo Finance, analysts expect over 39% growth ending December 14th, propelling the company to $2.1 billion. As time moves on, top line growth is forecasted to decrease, as the company gets larger.

 

LinkedIn is currently in its expansion phase, meaning that bottom-line expectations should be low. Average earnings per share estimates for 2014 (ending on December 14th 2014) are of $1.65, meaning that percent growth would be 2.5%. But when you look at EPS estimates for the following year (ending on December 15th 2015), they stand at $2.49 and represent a growth of 50%. 2015 will be the year when LinkedIn’s growth phase ends and when the fruits of the company’s expansion will be reflected in the balance sheet.

 

 

 

Price Target

 

 

Out of the 35 brokers listed on Yahoo Finance, the average price target is at $223.08, with a high of $280 and low of $141. Therefore if you were to take this into consideration, the reward/risk would be quite high. With upside potential of about 42% and minimal downside of less than 8%.

 

 

 

Conclusion

 

 

The correction the stock experienced during the first two quarters of the year provides long-term investors with a very enticing value proposition. Although top line growth is set to slow down, it will still continue its rapid advancement. Bottom line is anticipated to provide further growth in the following year. LinkedIn has done an outstanding job in preparing for its future. Its expansion towards job hunting will expand the user base and encourage new users to adopt the social network. All these reasons will contribute to LinkedIn’s growth and prosperous future as it asserts its spot as an essential social network.