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Text of The Bull and Bear Case for LinkedIn
The Bull and the Bear case forThe Worlds Largest
Invest in yourself, invest in your network, and invest in
society. When you investin all three, you have the best shot at
reaching your highest professionalpotential. As important, you also
have the best shot at changing the world. Reed Hoffman,
Co-founder,LinkedInReid HoffmanEntrepreneur. Product Strategist.
Investor.San Francisco Bay Area InternetCurrent Greylock, LinkedIn,
WrappPrevious College Eight, UCSC, Six Apart, TaggedEducation
LinkedIn is the worlds largest professional network on the
Internet with morethan 200 million members in over 200 countries
and territories. LinkedIn recently celebrated 10 years of business.
Started in 2003 with 14 employees. Now has 3,779. LinkedIn added 57
million new members in 2012. Total revenue increased 86% in 2012 to
Household income of LinkedIns US Members istwice the
Nearly 150 million members are outside the US.Source:
Used by 50% of Fortune 100 Companies.Source: LinkedIn
LinkedIn has three revenue sources:Source: 10-Q for
The Bull Case for LinkedIn Hyper-growth in all areas.
Adding Over 2 new members every second.Hyper-growth in all
Sales have risen at a compound annual growth of 95% over last 2
years.Hyper-growth in all areas.
In last 2 years, number of corporate customers has also
increased at a compound annual rate of 95%.Hyper-growth in all
The Bull Case for LinkedIn Profitability has been growing since
IPO in May, 2011.
TTM gross margin has grown to 87.1%.Profitability growing.
TTM CFO has dwarfed TTM net income.Profitability growing.
Growth in TTM CFO/share accelerated to 104% during the last 12
TTM FCF/share has been positive since the IPO and is
The Bull Case Market potential is substantial.
LinkedIn is just getting started. CEO Jeff Weiner estimates its
immediate addressable market is $27 billion;long-term its $80
billion. Trailing twelve month sales just $1.1 billion or 4% of its
immediate potentialmarket. Half the Fortune 100 are potential
customers. Just 2.6 million small and medium enterprises have free
company pages.There are 5.91 million small businesses in
U.S.Substantial market potential.
January 2013 WSJ survey showed 40% of small businesses found it
valuable.LinkedIns popularity is growing with small
businesses.Substantial market potential.
Small businesses are a large, relatively untapped market. The
SBA considers small businesses those with lessthan 500 employees.
99.7% of all employer firms in the US are smallbusinesses. 52% of
Americans work for small businesses.Substantial market
The Bull Case Bold enough to manage for the future even in the
Recognized inadequacies of hardware in late 2011 and
fixedproblem at expense of short-term sales. Growth was taxing
hardware. In November 2011, froze development of new features to
improverobustness and capacity of infrastructure. Talent Solutions
revenue per customer dipped to all time low for Q4 2011,just 7
months after IPO.Manages for future.
Decision was the right one for all stakeholders. Talent
Solutions sales per customer hasrisen from $9,196 to $10,159. Share
price has risen 184% during sameperiod.Manages for future.
Talent solutions revenue per customer now at all-time high and
growing.Manages for future.
Stock price fell to lowest level in late 2011, but has
recovered nicely.Manages for future.Price jumped 21% on February 8,
2013 after announcing Q4 2012 EPS that crushed estimates and
The Bull Case Expanding internationally and sales per employee
higher than in US.
More members outside US than inside Two-thirds or about 150
million membersare outside the US, showing internationalappeal.
LinkedIns site is now available in 19languages.Expanding
International sales per employee continue to outpace
domesticsales per employee.Expanding internationally.
The Bull Case Stickiness + Innovation.
Capturing members attention. Blogs from "Influencers. Virgin
FounderRichard Branson has 1.9 million followers. Pulse. A recently
acquired the popularnewsreader for the web and mobile.Very
Adding features to help expand members networks. Encouraging
members to add additionalconnections. Also a "People You May Know"
featurebased on people your connections know.Very innovative.
Added "Groups" to engage members in community discussions.
Groups are comprised of people withsimilar employment and
educationalbackgrounds. A great way to expand your network.Very
Adding new feature to allow members to transform their
profiles. Gradually releasing feature so members can add samples of
their work to theirprofiles, including video. Will transform
profile to a digital, interactive portfolio.Very innovative.
Recently introduced new version of "LinkedIn Recruiter." New
version easier for recruiters to use andeven suggests people to
hire which searchesmay not have found. Goals are to keep recruiters
on the site longerand make their time more productive.Very
LinkedIn Actively Encourages Employees to Innovate It has a
program called the "Incubator." Employees pitch ideas and
thoseaccepted are assigned importantmentors, including Reid
The Bull Case Managements wealth tied up in LNKD stock.
Managements wealth is heavily tied up in LNKD stock.Management
feels your pain.Market value based on 5/31/13 closing price and
amount of super-voting Class B stock held.
The Bull Case Hyper-growth in all areas. Profitability has been
growing since IPO in May, 2011. Market potential is substantial.
Expanding internationally and sales per employee higher than in US.
Stickiness + Innovation. Managements wealth tied up in LNKD stock.
Total Shareholder Return (TSR) since IPO exceptional.
Very successful IPO. IPO was priced at $45/share on 5/18/11.
First public sale was at $83/share on 5/19/11. Stock closed at
$94.25 on first day of trading,up 109.4% above its IPO
Total 2-Year shareholder return is exceptional. LinkedIn stock
has gained 120% in 2 yearsfor those who bought at the openingmarket
price of $83. For those lucky enough to get in at the$45 IPO price,
their gain is 305%.Excellent TSR.
The Bear Case Growth rates are slowing in all areas.
Member growth has slowed. Last year, growth averaged 8% vs.
peak of 14% in 2011.Growth rates are slowingin all areas.
Sales growth peaked in the first full quarter after the IPO and
has fallen ever since.Growth rates are slowingin all areas.
Rate of growth of corporate customers has been steadily
declining.Growth rates are slowingin all areas.
The Bear Case Reputation depends on increasing membership and
members completing and updating their profiles.
In the drive to increase membership, little information is
required to join.Dependent on number & quality of profiles. CFO
Sordello justified recent price hike by the doubling of its
membership to 200 million. Entering just your name, job title,
location and industry makes you a member. While counting as a new
"Registered Member," how valuable is a skeleton profile to
Passive candidate recruiting is key to customers who need
comprehensive data. From Q1 2013 10-Q:If our members do not update
their information orprovide accurate and complete information when
theyjoin LinkedIn or do not establish sufficient connections,the
value of our network may be negatively impactedbecause our value
proposition as a professional networkand as a source of accurate
and comprehensive data willbe weakened.Dependent on number &
quality of profiles.
Content difference between "Profile Strength" levels is small.
LinkedIn has 6 "Profile Strengths": "Getting Started," "Beginner,"
"Intermediate," "Advanced,""Expert" and "All Star." Entering your
name, title, location and industry ranks you as "Getting Started."
A title of"Retired" is sufficient. Two skills, one job and one
school with the dates of attendance qualifies as "Advanced." Adding
one more job and skill, raises rank to "Expert."Dependent on number
& quality of profiles.
Sales & Marketing personnel surpassed product development
shortly before IPO and has continued to grow.Dependent on number
& quality of profiles.
Quantity appears to be important than quality. LinkedIns
revenues are primarily dependent on the number of
"RegisteredMembers" so increasing that number is
paramount.Dependent on number & quality of profiles.
The Bear Case Most metrics dont measure effectiveness of its
3 of the 4 metrics reported are vanity metrics." Registered
members, page views and unique visits are good for headlines.
Analytics company Mixpanel and its investor Andreessen Horowitz
insteadsuggest informative measures of retention and
engagement.Most metrics dont measure effectiveness.
Company admits that a substantial majority" of members dont
visit even monthly. Q1 2013 10-Q states: The number of our
registered members is higherthan the number of actual members and
asubstantial majority of our page views aregenerated by a minority
of our members. Further, a substantial majority of our members
donot visit our website on a monthly basis...Most metrics dont
Number of registered members and unique visits not indicative
of broad activity.According to quantcast:1% of LinkedIns global
users ("Addicts") account for 31% ofall visits.64% of its global
users are "Passers-By," visiting just once amonth. (LinkedIn counts
even non-members in UniqueVisits.)Not known: What percent of
members dont visit evenmonthly?Most metrics dont measure
Less than 1% of registered members are paying members. Last
quarter, LinkedIn reported $65.6 million in PremiumSubscriptions
and 218.3 million members or $0.30/member inpaid subs. Since the
cheapest sub is $25/month or $75/quarter, there are atmost, 0.9
million paying members or 0.4%. Few members appear to find the
service worth paying for.Most metrics dont measure
Metrics which Would Measure the Companys Effectiveness % of
registered members with paid (not trial) premium
subscriptions(Netflix discloses this information). % churn in
premium subscribers and talent solutions customers. Number of
members who landed a job via LinkedIn. % of Talent Solutions
customers who hired a member. % of Page Views which led to reading
ads (spending at least 10 secondson the ad to eliminate errant
clicks).Most metrics dont measure effectiveness.
The Bear Case Demographics suggest US market nearly
US labor force participation rate (LFPR) is continuing to fall.
As of March, 2013, only 63.3% of those aged 16-64 were employed or
lookingfor work--about 125 million people. 90 million Americans
were unemployed and not even looking for work.US market nearly
According to BofA economist Michelle Mayer, the decline in the
LFPR Is due to two factors. Half the decline is due to
agingpopulation (the red line). The rest is due to a weak
economyand more young people opting forschool vs. work.US market
Demographics not encouraging for LinkedIn with 77% of its sales
dependent on hiring.US market nearly saturated.
LinkedIn may have saturated the US market for workers with
college degrees. According to quantcast, 57 million members (76%)
have at least a collegedegree and 82% of members are at least 25
years old. If 82% of the collegegrads are 25+, that would be 46.7
million members. For April, 2013, the BLS reported 49.5 million
college grads age 25 andhigher in the civilian work force.US market
The Bear Case Absent major changes, potential is limited.
What is LinkedIns downside? Weiner estimates its immediate
addressable market at $27 billionand $80 billion long term. Latest
TTM Sales were $1.1 billion. For Q1 2013, the rate of growth in TTM
sales YoY declined 28.1%from 100.6% to 72.3%. How much will growth
decline from here?Potential limited.
How should we consider LinkedIns potential market? Weiner said
there are 3.3 billion workers in the world. But, how many are
LinkedIncandidates? A fraction. In 2010, average world household
income was $9,218. In 2012, the International Labour Organization
calculated average world wages in PurchasingPower Parity (PPP)
dollars (what $1 buys here): Average world wage was $18,000. Only
31 countries had incomes above the average: 19 in Europe, US,
Canada, S. Korea,Singapore, Japan, Hong Kong, Australia, New
Zealand, S. Africa, Israel, Turkey and Qatar.Potential
LinkedIns Focus on Doing Just One Thing Well May Limit Growth
In a recent interview with Bloomberg West, co-founder Hoffman said
the lessonhe learned from his 90s experience with SocialNet was:You
should focus on one domain that really matters to people and dothat
domain really well, as opposed to a platform across all of them.
Where Amazon would be today if Jeff Bezos had insisted on focusing
on justselling books?Potential limited.
The Bear Case Increased use of mobile devices may cut into
Smartphone screens are small. The usable area on a smartphone
screen is nearly 10 times smallerthan the smallest PC, reducing the
space for ads. 27% of LinkedIns sales come from ads Other companies
have seen income drop with increasing adoptionof mobile.Shift to
mobile may reduce sales.
The Bear Case Valuation appears frothy.
Its gross margin is just 21% more than Facebooks, but
itsprice/sales is 57% higher.Is LinkedIn worth it?Valuation very
LinkedIns financial performance may not justify itsPrice/Sales
vs. Google and FacebookValuation very high
Facebook, Google and Amazon employees outsellLinkedIns by 2.4
to 3.8 times.Do LinkedIn employees generate more sales? NOValuation
Bull vs. Bear bottom line.LinkedIn is a very profitable company
with: a gross margin of over 87%. TTM CFO which continues to dwarf
net income. TTM FCF which has been positive since its IPOand
continues to grow. Stock is up 184% since low in 2011.
Bull vs. Bear Bottom LineBut, its Price/Sales ratio is still
very high at 17 comparedto historical peaks of companies like
Amazon, Googleand Netflix.
Bull vs. Bear Bottom LineLinkedIn has the advantages of a first
mover,continues to grow and innovate and currently haslittle
competition. Only time will tell whether itsbest days are ahead or