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LinkedIn (LNKD) recently announced that it will raise $1.2 billion in a secondary stock offering and plans to use the amount for managing its working capital, product development and potential acquisitions/investments. There is no doubt that the company is getting a very good price for the additional 5.38 million class A shares that it plans to sell. [1] Its stock is currently trading at price-to-earnings ratio of more than 700, and has doubled this year, registering an overall gain of roughly 450% over the IPO price. This is a very opportunistic move and will not only strengthen the company’s balance sheet, but also help in sustaining its rapid growth in the near term.

As of Q2 2013, LinkedIn had no debt with total cash and cash equivalents totaling $873 million. The company doesn’t pay any dividends and its shareholders have been rewarded by the massive capital gains. Therefore, it makes sense for LinkedIn to raise additional equity at an attractive price instead of going for debt that typically comes with several covenants, which limit the risks that management can take. LinkedIn is a growth stock. The company will need to expand aggressively to sustain its high valuation. We expect it to make more acquisitions over the next few years and increase its presence in emerging markets. The first half of 2013 has been extremely rewarding for Linkedin’s investors, as the company continued to gain share in $27 billion global talent acquisition market. [2]

Here is a snapshot of LinkedIn’s recent performance that has encouraged the company to raise additional equity to invest in its growth.


User Engagement Is Improving

LinkedIn has made several product enhancements in the recent quarters including endorsements, redesigned company pages, launching the website in local languages such as Danish and Norwegian, new profile features, notifications, and the ability to follow thought leaders, and sponsored jobs to help companies promote key positions to right people. The company has also been experimenting with a new feature, sales navigator and the initial results have been promising. Sales Navigator can be a useful product for LinkedIn as it helps sales professionals in better targeting customers, building relationships and marketing their products.

LinkedIn is not restricted to just recruiting anymore; it is becoming a great platform for marketers to find potential customers for their products through LinkedIn’s tools. The company launched ‘LinkedIn Contacts’ feature in the second quarter, rolling it out to a limited user base of about 1 million members. [3] The results were promising and there was notable improvement in user engagement. In addition to this, the newly launched functionality of adding rich media content such as photos and videos is helping spur the user activity on the site. The ‘endorsements’ are growing, LinkedIn’s Influencer program has done well, and its newly introduced channels have been helpful in streamlining the content flow for users. LinkedIn’s users are now following over 10 million channels, which make it easier for them to find relevant professional content.

Focus On Mobile Is Driving Growth

Like everyone else, LinkedIn is making efforts to capture the growth in the mobile market. In the first quarter of 2013, mobile platform accounted for 30% of the total unique visitors versus 19% a year ago. This figure further increased in the second quarter which is evident from the fact that the number of page views including mobile grew by approximately 69%, compared to 31% growth for desktop. [3] To bolster its mobile offering, LinkedIn has also acquired the newsreader app Pulse for $90 million in a transaction that included 90% stock and remaining cash. With Pulse’s more than 30 million users, LinkedIn can boost content offering on its app and website to increase user engagement and improve its targeted search.

Our price estimate for LinkedIn stands at $134, implying a discount of about 40% to the market price.

Notes:

  1. LinkedIn Announces Pricing of $1.2 Billion Follow-On Offering, LinkedIn Press Release, Sept 4 2013
  2. LinkedIn’s Investor Presentation
  3. LinkedIn’s Q2 2013 Earnings Transcript

Disclosure: No positions

Source: LinkedIn's Capital Raise Is Timely After The Stock's Big Run