LinkedIn (LNKD) will report its Q4 2012 and full year results on Feb. 7, and investors will look forward to certain key metrics, including revenue growth, user base growth, the company's performance in international markets and monetization growth. We believe that LinkedIn has been trading at a high valuation as indicated by its high P/E and a significant premium over our price estimate. This implies that the market is expecting high growth in the near term and whether or not LinkedIn's results will point towards such growth will be interesting to see.
Expect Good Revenue Growth Driven by International Expansion
We expect LinkedIn to showcase another quarter of high revenue growth driven primarily by international expansion. Close to 70% of LinkedIn's new users came from international markets in Q3 2012. At the end of Q3, about 63% of LinkedIn's total user base was international. On the revenue front, international markets accounted for only 36% of total revenues implying that there is a significant opportunity to improve monetization. In Q4, LinkedIn reached several international subscriber milestones such as surpassing 1 million members in Malaysia, 1 million members in Denmark, and 2 million members in South Africa. Overall, LinkedIn crossed 200 million members worldwide.
Job Postings Growing Fast
LinkedIn's job postings are increasing rapidly and we expect the company to report growth for its recruitment solutions business segment. Last month alone, job postings (at any given time) increased from close to 160,000 to over 200,000. This happened despite the launch of Facebook's (FB) social jobs. We believe that the company has a tremendous opportunity with job postings if it continues to execute well. A market for 3 million to 6 million monthly job openings exists worldwide currently and there is significant upside potential to our price estimate if LinkedIn can tap into even a quarter of this market opportunity (see "What's LinkedIn's Opportunity In The Job Postings Market?"). Perhaps the market is expecting such stellar performance for LinkedIn given that the market price is much higher than our current price estimate.
About half of LinkedIn's value comes from recruitment services and job postings. This business includes premium membership for companies that gives them access to special screening tools as well as job postings that are similar to online job postings from players such as Monster (MWW). We estimate that LinkedIn will earn close to $240 million in revenues from job postings in 2012, with annual job postings amounting to ~1.6 million. That's roughly 130,000 job postings per month (job postings on LinkedIn usually stay for a span of 30 days).
Looking Forward to Details on Progress of Sales Navigator
During its last earnings announcement, LinkedIn stated that it has been experimenting with a new feature called Sales Navigator and that the initial results have been promising. We look forward to the company's progress on this front. Sales Navigator can be a useful product for LinkedIn as it helps sales professionals in better targeting customers, building relationships and marketing their products. The search includes some advanced features that are not available to others and professionals can establish alerts based on these. The essence is that it will help companies sell their products to right individuals based on preference, age, location, etc. Sales Navigator can also be integrated with customer relationship management (CRM) software that companies already use, and that gives it a great advantage and appeal.
The software can also accelerate premium subscriptions depending on adoption and utility. If we assume that LinkedIn can get close to 100,000 customers signed up for Sales Navigator in next 2-3 years, it can add an incremental $50 million in annual revenues. Furthermore, if the company can garner 1 million such customers by the end of our forecast period, it can lead to $500 million in additional revenues.
There exists a risk that LinkedIn's high revenue growth rate may not be sustainable in the future. In addition to this, sales and marketing costs as well as R&D costs remain a concern and competitive risks may not be priced in. Although LinkedIn currently has a unique advantage of mixing social networking with recruitment services, the barriers to entry are low. Internet giants such as Google (GOOG) and Facebook have a vast amount of information and influence over their Internet user base that allow them to create viable recruitment portals, which can pose a serious threat to LinkedIn.
The market's optimism for LinkedIn is comparable to what Netflix (NFLX) saw in early 2011 when its stock price soared to $300 riding on the wave of high subscriber growth. But that wasn't sustainable. Even though management's missteps were a factor in the stock's slide, one cannot deny that the competitive picture has become clearer for Netflix over the past year and several giants with deep pockets have emerged as threats.
Our price estimate for LinkedIn stands $60, implying a discount of about 50% to the market price.
Disclosure: No positions.