LinkedIn’s China Expansion Might Be Hard To Execute

  • LinkedIn reported Q2 2014 financial results, beating analysts’ expectations for EPS and revenues, sending the stock price to an 11.7% increase a day after the earnings release.
  • LinkedIn presented weak progress in its international revenues with 60% of revenues originating in the US.
  • LinkedIn made a few steps into China to penetrate that market, however; Chinese market is currently dominated by local player Tianji that is owned by French rival, Viadeo.
  • With the global expansion problems and high P/S and forward P/E ratio LinkedIn is not the best tech company to invest in right now.

LinkedIn china opportunity faces huge risk

At the end of July, professional social network LinkedIn (NYSE:LNKD), reported its Q2 2014 financial results. LinkedIn reported net revenue of $534M, which is a 13% increase QoQ and an almost 50% increase YoY with double-digit growth in every operating segment. LinkedIn beat analysts’ expectations for Q2 2014 revenue and EPS, and its stock surged the next day to 11.7%, completing a 114% gain since IPO and 25% in the last three months. LinkedIn financials might be impressive, but another look into the geographical spread of the revenue highlights an alarming situation. LinkedIn is very US dependent and 60% of its revenue originate in the US market. As shown in Chart 1 below, the US to international revenue ratio slightly decreased from 1.8 in Q3 2012 to 1.47 in Q2 2014, emphasizing the importance of the US revenue to LinkedIn’s business.

LinkedIn revenues by geography

In order to grow further, LinkedIn has to reduce its dependency on the US market and increase worldwide membership.  LinkedIn decided to penetrate the biggest emerging market in order to drive international growth. At the beginning of the year, LinkedIn launched a simplified Chinese site for the Chinese market and opened a local office led by Derek Shen, president of LinkedIn China. LinkedIn chose an approach that most western social networks who tried to operate in mainland China did not follow, and it is currently censoring some sensitive material according to the Chinese censorship requirements. That might be a wise decision as other social networks, such as Google Plus, Facebook, and Twitter, who refused to cooperate with the Chinese censorship are not accessible from mainland China. These social networks try to offer marketing solutions or complementary services in mainland China in order to generate revenue there, but the task is much harder without a social network service in place.

Entering the Chinese market will not be a walk in the park as LinkedIn faces fierce competition from Viadeo, the French-based professional social network. Viadeo currently has 60M members worldwide (compared to LinkedIn’s 300M) and is focused on the European market and the emerging BRIC markets. Viadeo took a different approach than LinkedIn in entering China, and it purchased a local leading professional social network named Tianji in 2007.  Collaborating with Tianji allows Viadeo to address the Chinese market through a local player that is familiar with the local mentality and has a strong brand among Chinese working professionals.

As local professional social networks grow in China, it is only a matter of time until one of the big internet companies, such as Sina, Tencent, or Baidu offer a professional social network to compete with Viadeo-Tianji and LinkedIn. In case a local internet giant enters the market, the Chinese government might impose further restrictions on that market which may impact LinkedIn more than Viadeo. It will be easier for Tianji to align itself to the state requirements as it is a Chinese company. However, it will be harder for LinkedIn to increase the level of restriction if need arises as it already faces criticism on the current level of censorship it implements in China.

LinkedIn is in a sensitive place right now; the company evolved through acquisitions and good business decisions to a professional services giant that has a job search service, sales navigator to increase the number of leads, publishing service, and dedicated app to maintain the user’s connections. LinkedIn managed to break out of the social network market, and registered members can use its services through the new standalone apps (Pulse, Sales Navigator, Job Search and Connected) without the need to log into a social network. LinkedIn is in a spot where it can evolve to a global professional services provider or stay a US-focused social network. LinkedIn price-to-sales ratio of 14.4 and forward PE ratio of 75 indicate an overvalued stock, and rumors about giant short positions may indicate a sentiment change towards LinkedIn.


The intense competition from Tianji and the constant fear that one of the local internet giants will enter the market backed by the government's increased regulation puts LinkedIn’s growth in China at risk. As Viadeo focuses on emerging markets and global expansion through acquisitions, LinkedIn should act quicker and show results in the short term to offset negative sentiment backed by a high price-to-sales ratio and forward PE ratio. Investors should be careful before entering a LinkedIn position right now; however, current shareholders should re-assess their position in the coming few months in order to avoid a correction in stock price.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. Information provided in this article is for informational purposes only and should not be regarded as investment advice or a recommendation regarding any particular security or course of action. This information is the writer's personal opinion about the companies mentioned in the article. Investors should conduct their own due diligence and consult with a registered financial adviser before making any investment decision. Lior Ronen and Finro Financial Consulting and Analysis are not registered financial advisers and shall not have any liability for any damages of any kind whatsoever relating to this material. By accepting this material, you acknowledge, understand and accept the foregoing.

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