LinkedIn Corporation (LNKD) was founded with the intention of bringing together professionals around the globe. Today, it is the world's largest professional network available to job seekers and recruiters with a 277 million member base as of the recent earnings report. To enhance its profit margins and get back on the growth track the company is seeking new geographies for expansion and is exploring more personalized approaches to connect its members. The following discussion is intended to analyze the company's growth potential in China and its projected impact on the company's stock price.
The revenue base of the company shows an increasing trend in nominal terms but the company's year-on-year growth in percentage terms is slowing down as is apparent from the graph below.
Source: Company Presentation Q4
As per the recent earnings report more than 60% of the company's top line is attributed to the US region. The Asia Pacific region accounts for just 8% of the total revenues. Hence, high growth, if comes, will be from the Asian region.
LinkedIn is the most popular job search website for anyone who is looking for a job in the US. From the employers' perspective the website provides ample opportunity for recruiters to find and access the best available candidate pool. The website has bridged the gap between job seekers and recruiters and has effectively globalized the entire job hunt process. In addition to that, LinkedIn has a loyal consumer base anyone on LinkedIn, with or without a job, is there for the long term.
However, one drawback the company realizes is the fact that the content on the online network is not very engaging or diversified in nature. Anything and everything on the network is related to employment opportunities and the like. However, the company cannot risk losing its members by partnering with advertising agencies to make money. Maintaining objectivity in its published articles is one of the key strengths the company enjoys; however, it is not a very profitable strength from a financial perspective.
Up until now, LinkedIn has not faced any major competition in its area of business. However, the scenario might change in the future if another global leader, like Facebook Inc. (NASDAQ:FB), starts professional networking. Facebook is already allowing professionals to connect through different groups, pages, and events and it is rumored that it will formally enter the professional networking market.
LinkedIn is the only social network that is not blocked in China, possibly because it is used for professional purposes instead of engaging in political debates. Moreover, the network could be a profound resource for a number of Chinese professionals to seek jobs across international borders. LinkedIn saw the opportunity in China due to escalating salaries and high turnover rate in the country. Employers are facing headwinds to seek and retain skilled labor.
As of 2013, 14.3% of the skilled Chinese labor forced switched employers according to a survey conducted by a local headhunter, Aon Hewitt. The grueling competition for skilled labor among the recruiters opens gates for professional networks such as LinkedIn. Capitalizing on that opportunity, the company is expanding its operations in China where it already has about 4 million members; LinkedIn recently appointed Derek Shen in the presidential position for its China business to help propel its operations. Other than LinkedIn, the online job hunting market in China is majorly distributed between Zhaopin and 51job.
Chinese Beta Version: "LingYing"
LinkedIn planned to approach the Chinese market through a new website using the domestic Chinese language. The English version of the website has already been operating in the country but the company's decision to launch a Chinese based website is aimed at capturing the non-English speaking consumer base. In an effort to strengthen its roots in the market LinkedIn has partnered with local players, Sequoia China and CBC. Earlier, the company integrated its accounts with the local chat app, WeChat, to grab the attention of more than 300 million monthly users. Through these partnerships, LinkedIn hopes to gain access to more than 140 million Chinese professionals.
Some argue that localizing the website might cause the company to lose its one major strength which is the connectivity it allows for its multilingual member base. However, the company realizes that there are many Chinese users who would be more comfortable communicating in their native language. Therefore, the company's move to capture that member base is not flawed at all. Including Chinese, the company now supports 22 languages worldwide. Supporting a native language makes it easier to expand and establish oneself in a specified location. Understanding local consumer tastes and preferences is one of the most successful business tactics to establish business in a foreign land.
China May Not Propel Growth
Putting that theory aside LinkedIn's weaknesses begin to surface. Culture and local norms play an important role in propelling the success of any company. In China, LinkedIn's brand name is becoming its biggest setback. LinkedIn is pronounced as "LingYing" or "NingYing" in China; although the company purchased the rights to "LingYing", whereas it still hasn't claimed "NingYing" and might be purchased by some rival in the future. Other than that potential threat, LingYing has two meanings in the Chinese language: one of them and most probably the one sought by the company means "pick out the elites"; in Chinese slang LingYing translates into 'ghost child'; referring to the Chinese legend unborn children become spirits. These two largely differing meanings are expected to create confusion for the Chinese consumers trying to determine what the company stands for.
Now looking at the domestic competition, although Zhaopin and 51job are not direct competitors since they operate using a classified ads model, a smaller company Tianji is working on exactly the same model as LinkedIn. As of now, Tianji maintains 14 million members and targets the same consumer base as that of LinkedIn. Generally, loyalty to online social networks is low; however, the evidential fact may not translate the same way in the Chinese market where the competition is between a domestic and a foreign brand. China is aggressive when it comes to the promotion of its domestic brands in opposition to foreign brands. Secondly, one wrong move and the company may find its website banned forever. Although the company plans to adhere to censorship rules defined by the state being a Western company LinkedIn will have to be extremely careful and efficient in banning sensitive media lest they bear the burden of being banned from the largest consumer base forever.
Although the company's revenue growth is decelerating the company still maintains a strong position in the US. The company is enhancing its services to better cater to the needs of its members. However, the scenario may be different if Facebook decides to enter and capture LinkedIn's member base. Moreover, company's outlook in China is very improbable and shaky. Although the actual performance has yet to be seen the company may not be as huge a success as it projects to be.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.