- LinkedIn is largely self-policing, so it scales better than other social networks.
- LinkedIn growth is slowing as the revenue base grows.
- If the company can deliver promised profits LinkedIn stock will rise again.
The success of LinkedIn (NYSE:LNKD) has surprised and befuddled analysts for years now.
Since going public in 2011, LinkedIn has more than doubled in value, even after a fall that began in November, from over $250/share, to about $190 during the week of January 18.
LinkedIn is due to report earnings on February 4 and analysts are expecting net income of 78 cents per share (consensus), while hoping for 84 cents (whisper), on revenue of about $856 million. Investors have been willing to pay a premium for LinkedIn stock --- over 12 times its annual revenue – because revenues keep growing rapidly.
The recent sell-off in LinkedIn stock is mainly due to the growing risk aversion of the market, and also due to the law of large numbers.
For all of 2015 LinkedIn is expecting revenue of $3 billion, against $2.2 billion in 2014. But that’s growth of 35%, against 47% for 2014 and 55% for 2013. As numbers get bigger it gets harder to grow them.
LinkedIn has grown like Facebook (NASDAQ:FB) or Alphabet Inc-A (NASDAQ:GOOGL) rather than like Yahoo (NASDAQ:YHOO) or Twitter (NYSE:TWTR) because its social network scales, and attracts advertisers organically. LinkedIn is essentially a jobs board, like Monster (NYSE:MWW) (which was a hot stock in the last decade), but with a twist. While Monster takes in resumes and re-sells them to employers, LinkedIn lets job-seekers interact directly with those employers, and continue that interaction after they are hired. It’s not just a jobs board, it’s also a career networking center. The people who use it intelligently get enormous value from it, while paying very little for the privilege.
Because the heart of LinkedIn is jobs and careers, it’s also largely self-policing. What users are doing is building, buying, and selling their credibility. This means the business model is not easy to attack, and it defends itself without much intervention.
Even Facebook, which has grown faster, would be having more trouble than LinkedIn if it were not for its ancillary, largely self-service businesses like Instagram and WhatsApp. It costs money to police people, and it costs money to deal with police who are policing people. In their career lives bad reputations spread organically.
Minor tweaks to software at LinkedIn, meanwhile, still gets big results. A simple change to its mobile app last year doubled referrals to publishers by making networking of content easier. Most people still don’t use the site as effectively as they could, but the site doesn’t have to spend a lot on training. People get results as they learn and do this themselves, and the more effective people are on LinkedIn, the more valuable it becomes.
This is not a perfect company, nor is it a perfect stock. It lost money in 2014 and will lose more for all of 2015, servicing its growth. The rate of that growth is naturally slowing, but the absolute size of that growth means profits remain elusive. But if LinkedIn can deliver on the promised profit in its next quarter report, LinkedIn stock is going to fly anyway.
LinkedIn stock, in short, is a risk-on, speculative investment. You’re looking for capital gains, not dividends. If you can handle the risk it’s still a worthwhile stock to be in when fashions turn to growth.