Monsters Worldwide (MWW) has seen a steady decline in revenues over the past few quarters, caused primarily by the worsening international job market and the shift towards an "Online Social Resume". LinkedIn (LNKD), on the other hand, provides a more cost effective way for recruiters to connect with potential employees. The steady increase in LinkedIn's user base is a clear indication of its popularity and growth prospects. Based on the aforementioned reasons, which are discussed at length below, we maintain a long position in LinkedIn and a short position in Monsters Worldwide.
Monsters Worldwide is the parent company of Monster, a global employment solution provider. The company operates under three segments, namely Careers International, Careers North America and Internet Advertising & Fee. The Employment Solution Industry is going through a dynamics shift, with LinkedIn being the biggest threat to MWW.
Monster's share price fell in the wake of investor disappointment with Q2 results. The QoQ net income dropped almost 57%. The share price dropped 20% to a new record low of $5.72, from $7.11. Losses continued to pile up on the European front where the economic slowdown has significantly reduced employment opportunities. Analysts were expecting EPS of $0.056, compared to the actual results of $0.04 (approximately 29% lower). Wall Street was estimating Q3 EPS to be 9 cents per share, which the company announced could be as low as 2-7 cents per share. Bookings for China fell approximately 23%. A silver lining was the 14% YoY increase in revenues from Careers-North America. This seems insufficient to rescue Monsters from the changing market dynamics and the global economic slowdown affecting the Recruitment Industry. Also, any speculation on a possible acquisition has cooled off for the time being. The management has maintained that they are looking for any possibilities regarding the sale of any of its segments, as well as the company itself.
LinkedIn is currently the leading professional network on the internet with over 175 million members internationally, which is a 52% increase over Q22011 user figures of 115.8 million. The primary source of revenue for LinkedIn is hiring solutions and marketing solutions sales. The professional platform also generates revenues from its members, who can subscribe to premium services for a fee.
LinkedIn beat investor expectations by reporting higher than expected sales for the second quarter of $228 million, as compared to analyst expectations of $216 million. The QoQ increase was a hefty 88% percent, as revenues in Q22011 were $121.04 million. The growth in hiring solution (107%) and marketing solution (64%) was the primary reason behind the increase in total sales. The results appreciated the company stock almost 6% in aftermarket trading (the stock closed on $93.5 and now is trading at $111.5). The net Income did suffer slightly due to heavy spending on an increasing head count. The accelerated pace of product innovation was one of the driving factors behind strong quarterly results. One of the biggest challenges for technology companies right now is to successfully access the growing smart phone user base. According to the company, over 27% of its unique visitors are now coming from mobile phones and 15% of total registration is originating from phones. The new mobile pilot program, which enables blue chip companies to display ads on the LinkedIn app, is an effective step towards mobile monetization.
The continued growth of LinkedIn will continue to hurt Monsters.com. The share price comparison of the two companies shows the falling interest in MWW, and the rising popularity of LNKD. The revenue stream of MWW will continue to decline in the near future, whereas there is a steady increase in the revenue stream of LNKD.
As far as valuations are concerned, MWW is not trading cheap. Its trading at a forward P/E of 22x and 32x using 2013 estimated earnings. Using the EV/EBITDA multiple, it can be calculated that LNKD will be valued at $172 by the end of 2013. (Based on 2013 EBITDA estimates of $320m and an EV/EBITDA multiple of 34x)
The attractiveness of social media recruiting lies in its ease of access. It provides a platform for employers and employees to interact in a cost effective manner. The falling trajectory of Monster's revenues is likely to continue or become stagnant at best. LinkedIn will be, in our opinion, the biggest beneficiary from Monster's decline.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.