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Summary

  • LinkedIn reported better than expected results primarily due to increased user base and higher activity.
  • LinkedIn has made numerous updates to its features that made the company well positioned to attract more users.
  • The company is determined to make significant progress in key strategic priorities that include increasing the scale of job opportunities and expanding the publishing platform to every member.
  • LinkedIn recently announced it would combine job listings from other websites such as Limited Listing which will serve to further strengthen the recruitment services business.
  • Upon successful implementation of aggregate job listings the company will be able to lead the global recruitment market.

As I wrote in my previous article, LinkedIn (NYSE:LNKD) beat analyst estimates thanks to the addition of new members resulting from the launch of new and engaging features. The increased user activity was the prime reason behind the growth in overall revenues. During Q2 2014, the company gained 17 million new members reflecting an increase of 6 percent compared to a gain of 16 million a year ago. The increased user base has caused the adjusted diluted earnings and revenues to climb significantly. The company delivered adjusted diluted earnings per share (EPS) of $0.51 on revenue of $534 million. This reflects an increase of 34 percent in EPS from the previous year's earnings of $0.38. Similarly, the revenues also increased by 47 percent compared to the previous year's revenues $364 million. Given the impressive results, the company's stock price jumped from $160 per share to $201.78 per share within the last couple of weeks as shown in the figure mentioned below.

(click to enlarge)

Source: Finviz.com

The growth in revenues was primarily driven by revenues from Talent Solutions products that increased 49 percent compared to the previous year's figure. Let us discuss the root causes of the better than expected results while putting special emphasis on investigating whether or not LinkedIn still has room for future growth.

Recent Steps to Ensure Long-term Growth

During the current year, LinkedIn made certain updates regarding redesigning the profiles. This has greatly helped recruiters to identify suitable candidates as member's key talents and attributes are clearly visible. Similarly, the weekly long-form posts from the publishing platform have also exceeded 30,000. It is of worth mentioning here that the publishing platform is still available to a limited number of members and the company is on track to allowing access to every member. This will enable members to market their knowledge and skills which will accelerate their user activity. Upon successful implementation of the service the company expects robust increase in traffic.

The company is putting efforts into growing its application portfolio. It recently launched an iOS app called Connected which allows LinkedIn members easily deliver updates and opportunities in a timely manner. In addition, the mobile job search app has also played a part in boosting user activity. Users who have been actively using the app tend to view approximately 15 jobs per week. The number of job listings reached more than 1 million. The increased activity can be accurately estimated as the mobile views accounted for 40 percent of total jobs viewed in the current quarter compared to 25 percent in the previous year.

Going forward, the company announced it would combine the job listings from other sites, creating a new feature known as Limited Listings. This feature is different from other LinkedIn jobs as the new jobs can only be seen by candidates who are actively searching for them. The move will not directly increase revenues but may improve value proposition by attracting more active users. The higher user activity will facilitate recruiters from all around the world in identifying suitable candidates. The increased user activity will be translated into a higher success ratio for recruitment. In a nutshell, by facilitating the meeting of job seekers and recruiters LinkedIn is on track to leading the global recruitment markets.

Factors that can affect the valuation

Although LinkedIn is currently offering enormous investment opportunities, it also faces certain risks that can adversely affect its valuation. The current stock price of LinkedIn is heavily based on higher expected earnings growth driven primarily by LinkedIn's competitive advantage of combining social networking with recruitment services. Other Internet giants, such as Facebook (NASDAQ:FB) and Google (NASDAQ:GOOG) (NASDAQ:GOOGL) that have huge influence over the internet user base, can utilize this information and create viable recruitment portals. In addition, other local and international recruitment service providers could also use the data of LinkedIn to launch better recruitment portals. The potential threat of competition continues to be a major headwind to LinkedIn's stock price. Therefore, investors are advised to keep themselves updated with any development in this regard.

What Does the Future Hold for LinkedIn?

Overall the company posted impressive results and has showed that it certainly has room for further growth. The recently enacted initiatives will help the company to bring more users to its user base. LinkedIn has been able to post higher earnings as the targeted ad products continue to bring in more marketing money. Similarly, the decision to give access to the publishing platform to every member will not only bring in more users but will also help the company to turn the non-active members to active ones.

LinkedIn is also growing its multi-app portfolio. The recently launched Connected app aims to strengthen the company's portfolio. Moreover, with Limited Listings, LinkedIn is positioned to improve its value proposition and attract more users. Given the above mentioned arguments and facts, I believe that the company's growth potential has not been exhausted and that there is still room for growth. However, investors are advised to consider the above mentioned risk before making any investment decision as any threat to the future earnings growth can significantly discount the stock price.

Source: LinkedIn Is Worth A Shot