Last week, I suggested Twitter (TWTR) was a stock worth buying, not so much because it was undervalued from a long-term, buy-and-hold investor’s perspective, but because the stock had a lot of technical bounce potential following its oversized beat-down.
Twitter hasn’t been the only social media stock to be unduly punished lately, however. LinkedIn (LNKD) also took the same beating most social media names have suffered over the past several weeks.
There’s a key difference between the bottom-fishing I recommend you do with LNKD, however: My bullishness on LinkedIn stock is specifically rooted in the company’s long-term — and largely overlooked — growth potential. Indeed, much of its future revenue has already been won.
LNKD Lands in China
The Far East has proven tricky –– and sometimes completely elusive — to Western websites. Google (GOOG) only holds 12% of the nation’s web-search market, and that percentage is dwindling. Meanwhile, Twitter and Facebook (FB) are still banned in the country, even though a few users manage to sneak over the wall.
LinkedIn, however, may find more success in China. It’s certainly planning on it, announcing in February that the company would be launching a Chinese-language version of the professional networking site in that country. And perhaps more importantly, the company’s management has made a point of explaining it’s going to police itself and the content that appears on its local-language, sidestepping the censorship problems that have thus far kept Facebook and Twitter on the outside looking in.
At stake is a pool of 140 million professional workers, most of whom don’t currently use a professional-level networking tool, mainly because there’s not one that caters to China. For perspective, LinkedIn reported in April that it had passed the 300 million user mark. That was enough of a user base to drive $473 million worth of revenue in the first quarter of 2014. Assuming semi-commensurate penetration of the Chinese market, China could easily mean another $100 million — maybe more — in annual revenue for LNKD.
Loads of Revenue Waiting in the Wings
The potential revenue that China could bring to the company is exciting, but it’s worth noting that LinkedIn was poised for a revenue explosion anyway, even without China.
It’s a detail that isn’t underscored often enough by fans and followers of LinkedIn stock, but the bulk of the revenue that LinkedIn generates is subscription-based revenue. It matters, because though revenue may be “lined up” at a single point in time, it’s not booked on the income statement right away. Rather, it’s booked when the company actually delivers the service to the subscriber. In the meantime, it sits on the income statement — where few investors ever look — as deferred revenue.
And how much deferred revenue is LinkedIn sitting on as of the end of the past quarter? A whopping $480 million, up from only $140 million at the end of 2011, which was up from $26 million at the end of 2009, according to data provided by Thomson Reuters. Yeah, LinkedIn has some sales momentum. Remember, the company “only” generated $473 million in sales last quarter. It’s got more than that amount just waiting to be booked (and that doesn’t include the new business the company will win in the meantime).
Similarly, LNKD has watched the accounts receivable line of the balance sheet rapidly ramp up too, from $24.3 million at the end of 2009 to a hefty $328.7 million as of the end of the first quarter.
The point being, it would almost be difficult for LinkedIn to not keep growing at its strong double-digit pace.
Bottom Line for LinkedIn Stock
Last year, LinkedIn saw revenue grow by 57%, and Q1’s sales growth rate of 46% says the company is still going strong. Yes, the company is spending heavily to fund that growth, particularly in China, but that’s money well spent.
Besides, it’s not like LinkedIn can’t afford it. As of the end of the first quarter, the company is sitting on a cash and cash-equivalent warchest of $2.3 billion. It should start to invest some of that stash in its growth, and China is the right place to do it.
Perhaps most compelling of all, however, is that LinkedIn is projected to swing back into the black this year after some recent heavy spending pulled the company into the red for the cumulative trailing twelve-month period. Once the market is reminded that a normally-operating LinkedIn is a profitable LinkedIn, the buyers will come back to bid up LinkedIn stock again.
Until then, you can get LNKD on sale for a price that’s 40% off its September high.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.