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Summary

  • LinkedIn still has healthy revenue growth.
  • LinkedIn has a diverse revenue stream, the largest of which is its talent acquisition service.
  • LinkedIn has a unique service that caters to higher-income, younger people.

LinkedIn (NYSE:LNKD) had its initial public offering in the middle of 2011, with each share going for $45. Since then, the stock has appreciated excellently: as it stands now, each share is worth ~$157. LinkedIn is different than other social media firms in the sense that it's professional. It's the only one that offers a paid "Premium" service that allows its users significantly more flexibility using the service. LinkedIn has also had strong revenue growth, although the stock is lower than its high point of $250. Was that an overvaluation, or is now a good time to buy? To answer this question, we need to look at LinkedIn's fundamentals and the market that it operates in.

Fundamentals

First things first: revenue. Looking at the trailing twelve-months' (an average of the last 4 quarters) revenue, we can see that LinkedIn has maintained strong growth.

Source: YCharts

The firm has a market capitalization of $19.15 billion as of now. These are healthy revenues for a company of its size, but we can't be sure that they're going to keep growing. LinkedIn has been profitable, but it has also lost money recently. One possible explanation for this is continued investment in growth.

(click to enlarge)

Source: YCharts

Source: YCharts

A look at the firm's current ratio (assets/liabilities) shows that it's very solvent, with assets worth roughly four times as much as its liabilities. On top of all this, LinkedIn has been acquiring more debt, as you can see below. This means that the firm has been accruing assets and liabilities at a brisk pace - a hallmark of a growth-confident management. Keep in mind that this is a software firm; it only has ~5,000 employees. The liabilities incurred are in excess of what would be needed to build a strong digital infrastructure; the firm is probably expending heavily on marketing its service to professionals.

Source: YCharts

Things look good on the fundamentals front. None of this means a thing if LinkedIn isn't operating in a good market or isn't able to acquire or retain users. It's worth looking at other aspects of its business to determine whether the stock is a good buy.

Revenue Structure and Market

LinkedIn has several different revenue streams. As I mentioned earlier, the firm has a subscription service that gives users a more comprehensive package, one allowing them to network more fluidly with others. LinkedIn also sells advertisements, the lifeblood of most technology companies. What really sets LinkedIn apart is its commercial revenue component; the firm offers talent acquisition services to other businesses. The system is flexible and allows a talent-seeking company to screen users by a variety of metrics, all provided by users of the website. As seen below, this is actually LinkedIn's most prominent revenue source:

Source: ComScore, Statista

Although subscriptions and marketing solutions both appear to be slowing down, they are still growing. The talent acquisition revenue stream is growing rapidly. Firms have probably found that LinkedIn's data-based solution allows them to find applicants with greater ease and less capital expenditure. Vital to LinkedIn's survival is its user base. The firm has roughly 140 million users as of now, and growth appears to be slowing down. Keep in mind that the service is professional-oriented; this closes the market to people under 18 or who are not inclined to use a social network in order to further their careers.

Source: ComScore, Statista

That being said, the user base isn't the only number to be concerned about. LinkedIn has a relatively wealthy user base, as can be seen from the chart below.

Source: ComScore, Statista

The higher income of LinkedIn's users allows the firm to set a higher price on the service, which is fairly expensive as of now (more than $600 a year for Premium). It's not surprising that higher earners are drawn to LinkedIn: the service exists as a way to further your career and keep track of business contacts. The company offers unique features within its sector, including a variety of ways to discover people that you work with and people that you may want to work with. A survey conducted by ComScore shows the utility that people get out of the service:

Source: ComScore, Statista

It appears that LinkedIn can be leveraged for a variety of career-related purposes. It's a safe assumption that the younger, more tech-oriented generation will be driven to use LinkedIn in order to further their careers - and they're going to pay to do so.

Conclusion

Although LinkedIn isn't making stellar profit and has a reasonable amount of debt, it has strong revenue growth and a unique service. Although there are direct competitors for certain aspects of its business, no one else offers a fully integrated social career service. I think that LinkedIn stock can hit its previous high and more, but the time period is difficult to identify. Keep an eye out for the earnings due out in a couple of weeks - they should be healthy. LinkedIn looks like a buy at its current price.

Source: A Lot To Like With LinkedIn