LinkedIn (NYSE:LNKD), a social network that connects professionals of all sorts, enabling them to meet new peers and perhaps create new business opportunities down the road, has been growing by leaps and bounds amassing scale. But it faces a problem. It lacks scope - a broad range of services that will allow the company to spend more time on its site, monetizing its dominant market position.
LinkedIn's problem is confirmed in its recent earnings report, whereby the company's earnings from advertisement are anemic, given its size. But this problem can be fixed. All it takes is for the company to develop its own content, as sites like Yahoo.com and Google.com are doing rather than relying on circulating summaries of content published elsewhere.
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But there is another problem LinkedIn faces that is hard to fix: Competition from other social networks. While the company currently enjoys economies of networking at this time, it may face competition down the road. Contrary to what Brian Pitz, an analyst at UBS wrote, there is no "significant barrier to entry for the competition." It would not be difficult for Facebook to create its own professional network, or even modify its current platform to adjust to the professional needs of its user base. With Facebook having over half a billion more users than LinkedIn, if Facebook does decide to create a professional network, LinkedIn will be in serious trouble.
Social networking is a highly fluid area of the web; new social networking sites are constantly sprouting up and gaining momentum (e.g. Twitter). Even though LinkedIn is well established, it may still be susceptible to emerging social networks. For instance, MySpace (NASDAQ:NWS) was the most popular social networking site until Facebook swiftly surpassed it. Given the fickleness of social networking, LinkedIn could be just as easily overtaken by an emerging network in the near future.
What should investors do with the stock?
It depends on the investment horizon of each individual investor. Short-term oriented investors may want to use the current pullback to accumulate the stock. Long-term investors should keep a close eye on the competition before establishing new positions.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.