In this article, I'm going to talk about LinkedIn (LNKD), the world's biggest professional network. Now, the website has more than 200 million members in over 200 countries. This analysis is focused on the income statement of the company. There are good and bad points that I will explain below.
First of all, I start with the positive points I have seen in the income statement. The revenues are the first one. In fact, revenues have tripled in three years. This huge improvement is bigger than Facebook's (FB) revenues increase (150% in 3 years), and Renren's (RENN) revenuesincrease (130% in 3 years). Professionals are more willing to spend money on LinkedIn than traditional users of social networks, like Facebook. The main reason is that LinkedIn is used for business. In fact, companies can use LinkedIn to look for the best candidate and contact him/her quickly. Moreover, they can compare several ideal candidates easily. And, for the professional workers, being on LinkedIn is a good opportunity to boost their carrier.
The second positive point is the increasing gross profit margin over the years. The gross profit margin was at 81% in 2010, and for the year ended, it was at 87%. It means that the company has a strong competitive advantage in that market space. In fact, I only know one company which is working in the professional network business, and obviously, this company is called LinkedIn. This is one of the company's strengths - it is well known and used all over the world.
Now, let's talk about the only bad point. Total expenses are increasing year-over-year. They were at 59% of total revenues in 2010, and for the year ended, they reached 73% of total revenues. It has been an increasing trend for the last three years. When the revenues have increased by more than 300%, the total expenses have improved by 394%. If the company can go on increasing revenues at this rate, it won't be a problem in the future because the company has been profitable for the last three years, despite the big improvement of the expenses.
In spite of this large increase in the total expenses, the operating profit margin is higher for the year ended than it was in 2011. The operating profit margin represents 6% of the total revenues and constitutes the third positive mark I point out.
Since the IPO, LinkedIn share price has increased by approximately 100% and, according to Google Finance, the company has a Price-to-book ratio of 21 and a Price-to-sales ratio of 20, which is much bigger than Facebook. If you want to invest your money in social network companies like Facebook or Renren, LinkedIn is certainly the most attractive one, regarding the income statement analysis. Nevertheless, I think it is better to wait for a lower price, because at $186 the company appears very expensive. If you believe in value investing, it is obvious that you won't buy LinkedIn at this price.