- LinkedIn will undoubtedly take advantage of the potential higher engagement levels which will lead to stronger advertising revenue.
- Premium subscriptions will grow due to more value being added to the user.
- MAU users continue to grow steadily. Furthermore, top talent will stay which will drive the company forward.
The consensus surrounding Microsoft's (NASDAQ:MSFT) recent takeover of LinkedIn (NYSE:LNKD) has been definitely one of negativity in recent days. Many investors and analysts believe that Microsoft has vastly overpaid for the social network company and will come to rue this decision in the forthcoming years. Although the price tag seems lofty ($196 a share in an all cash transaction valued at $26.2 billion), LinkedIn on the surface seems a perfect match for Microsoft in that LinkedIn's 430 million+ members can definitely be targeted to cross sell Microsoft's products and services. Furthermore, negative commentary has focused on the huge premium Microsoft shelled out to acquire the company. The stock jumped more than $60 before the market opened on the 13th of this month which represented around a 50% premium over the closing price on the preceding Friday. However, I would remind investors that LinkedIn traded at over $250 a share eight months ago and it is still predicted to grow its top line by 20%+ levels both this year and the next. Microsoft is getting an asset here with extremely valuable data. The question remains, can it take advantage of its users?
Huge Scope To Sell More Ads
So although user number growth is vitally important for social media networks to grow, engagement levels are also extremely important especially when the respective network is selling ads. Therefore what will now probably happen is that existing LinkedIn members are now going to have far more services embedded within their accounts which will drive engagement levels far higher. If LinkedIn can convert a large percentage of its monthly users to daily users, then ad pricing will go through the roof. This is where I see the potential in this platform. Facebook has already demonstrated that advertisers prefer placing ads on social media platforms as the lead is more targeted. LinkedIn up to this point hasn't focused on running large amount of ads compared to Facebook who brings in 90% of its revenue from ads. LinkedIn collects around 60% of its top line from recruiters (Talent Solutions) as fees for enabling them to talk to prospective job seekers. Therefore expect ad numbers to rise significantly as engagement increases on the platform.
Premium Subscriptions Will Increase Especially For Users Who Want The Network And Tools
The "Premium Subscriptions" side of the business should also get a lift in the future. LinkedIn is still growing its user base at a healthy clip especially in China where there is ample runway for growth. The combination of MAU growth combined with a premium offering that will enable many of these users do all their work on the platform will definitely increase premium subscriptions. Why? Because LinkedIn now can become a one stop shop for many business professionals in that now Microsoft's cloud capability and suite of products will be combined with the most targeted network of business professionals which on the surface looks very promising. LinkedIn pulled in $149 million last quarter from premium which was a 22% hike from the same quarter of 12 months prior. It will be interesting to see what LinkedIn pitches their different offerings at here but this figure should rise substantially going forward.
Top Talent Will Stay Due To Share Price Remaining Elevated
What's more, because of the weak guidance LinkedIn announced in February, the stock got clobbered to around $100 a share before it finally rebounded to $120 before the end of that month. The share price is a significant metric at LinkedIn because employees are paid largely in stock. In fact, the social media company paid out $510 million in stock based compensation last year which mean operating income came in as a negative number. Therefore with the stock now closing in on $200 a share, there should be no risk of valuable employees leaving for greener pastures. Keeping top talent is a critical component of growing a social media company. We saw how Twitter's stock reacted when it went through its own mass exodus of staff. LinkedIn's new deal should ensure it wont undergo the same fate.
To sum up, I believe Microsoft coming into the picture will be a very good move for LinkedIn. Office 365 will definitely be move the needle for growth and engagement levels should increase on the platform as a result of the added value coming from Microsoft. This engagement over time should lead to very high price realizations from ads. I see 20% upside from its present share price.