Social media companies are not all created equal. One particular company, LinkedIn (LNKD), could possess awesome earning potential that can clearly set it apart from the likes of Facebook (FB), Twitter, Zynga (ZNGA) and Groupon (GRPN).
LNKD is currently estimated to have about 150 million users. That is substantially lower than Facebook's estimated 845 million users and Twitter's estimated 500 million users. However, once a company has a respectable amount of members, and LinkedIn's 150 million members is a substantial base, it is more about quality and less about quantity.
As a professional networking company, LinkedIn's advantages lie in its still relatively untapped potential to capitalize on its members' average age, average income and primary membership motive.
It is estimated that LinkedIn's members have an average age that ranges between 25 and 54, with about 39% in the position of manager, director, owner, chief officer or vice president. Both Facebook and Twitter are estimated to have a lower average user age. Such user profile places LinkedIn at a clear advantage for potentially monetizing the "status" of its members.
To further illustrate this point, my children are the primary force that continuously lobbied to convince me to open a Facebook or Twitter account. Meanwhile, it is my co-workers, and business contacts, that have lobbied to convince me to open a LinkedIn account.
It is estimated that average household income for LinkedIn members is about $109,000 per year. Meanwhile, Facebook and Twitter members are estimated to boast average household incomes in the range of $25,000 to $52,000 per year.
If properly monetized, higher average household incomes should also lead to higher average advertising revenues generated per member.
Primary Membership Motive
LinkedIn members' primary motive for joining the social network is to develop their professional and career circle, whether to search for talent, brainstorm and network with other professionals, participate in content rich discussions, or market themselves to other professionals.
At the end of the day, it is about jobs, salaries, compensation, executive search, image, career and money. Whether consciously or subconsciously, it seems that LinkedIn members believe their career (financial) status will benefit from such a professional network. LinkedIn can enrich them. Some even believe that not being part of such network can possibly negatively impact their marketability and career growth potential.
Meanwhile, Twitter and Facebook members are primarily interested in finding friends, staying in touch and keeping tabs (and providing tabs), on the latest news and activities. As for Zynga, it is primarily interested in offering online social games, and hence its members are interested in entertainment for the cost of a few cents (although such cents can certainly add up), while Groupon members are interested in saving money on their purchases.
It is very clear that many LinkedIn members may feel they have a very powerful and compelling career (financial) reason to be part of the professional network. While Facebook and Twitter can aspire to monetize $10 annual revenue per member (while they are still not there), LinkedIn can aspire for much higher revenues per member. For example, some traditional executive search placements can generate as much as 10% to 30% of first year total compensation in fees for the executive recruiter who placed the professional. A recruiter who places a professional for a $200,000 annual salary job can potentially collect as much as $20,000 to $60,000 in fees for such single placement.
There is no question that LinkedIn will not eliminate, nor replace, the need for executive recruiters. However, it will certainly affect the traditional model, and both recruiters and professionals will utilize it. As LinkedIn has evolved itself as a professional network, and as long as it remains true to its original mission, it is also unlikely that LinkedIn will become a depository of resumes nor a generic employment agency.
What could all this mean for LinkedIn shares?
It is mostly about monetizing LinkedIn members' status. Whereby others may be primarily driven by increasing advertising revenues, LinkedIn's future lies in its potential for generating custom solutions (and charging premium fees) for the executive search market (in addition to premium advertising revenues).
LinkedIn has added about 50 million new members in the past year, to reach its current base of about 150 million users. If its membership base settles at around 200 to 250 million users during the next few years, and it is able to implement executive search related revenues (in addition to premium advertising fees), LinkedIn could be substantially better off than boasting 500 million users. In the case of LinkedIn, once 200-250 million users are reached, it is quality that matters, and no more quantity (number of members). As a matter of a fact, we believe that beyond such a point, quantity may risk making LinkedIn generic, and cause it to lose its "professional network" status.
LNKD shares closed at $90.41 as of February 23, 2012, with a market capitalization of $8.91 billion. It had reached a high price of $122.70 on May 19, 2011. As LNKD has not yet fully monetized its members' status, its revenues have languished, as has its share price.
However, given LinkedIn's advantages when compared to other social media companies, we believe LNKD can possibly reach over $200 per share. If LinkedIn is able to generate $10 in net revenues per member on a subscriber base of 180 million users, it would generate $1.8 billion in net revenues annually, which at a 10 P/E multiple would result in $18 billion market capitalization; yet, LNKD has potential to generate more net revenues per subscriber, on a an even larger subscriber base.
Data as reported on 8/12/11 at socialbrothers.net, "LinkedIn, Twitter and Facebook, Who's Using What?"