Social media has clearly become a well-established part of the business world, with 96% of 18- to 35-year-olds using some form of it. The industry is still enjoying rapid growth, but it’s now becoming mature enough where we can start separating the winners from the losers.
Facebook (FB) is an unquestionable winner with its 1.44 billion users — or roughly 20% of the Earth’s population. There can be trading opportunities with a stock that’s already on the move, but for investing purposes, I want to look for the next winner in this space.
That’s why I recently recommended LinkedIn (LNKD) in my GameChangers newsletter. It’s the dominant social media platform for career development, but one of the main reasons I like this company is because it’s a unique brand that’s difficult to replicate. LNKD has over 347 million members across 200 countries, so it will be hard for Facebook — or any Internet company, for that matter — to successfully compete, given its established base and huge first-mover advantage.
The company also has several drivers in place that will help it continue to grow in the longer term. First, it’s already the “professional profile of record” for each of its members, and now management is seeking to become a “publisher of record,” as LinkedIn.com is increasingly becoming a website where members keep up with the latest industry news. This helped drive 30% growth in member page views in the most recent quarter.
Secondly, Asia (at only 9% of total revenue in 2014) is a fantastic opportunity for growth, and early efforts in China have been very successful since LNKD has no competition there. Members in China — a country in which Google (GOOGL) and eBay (EBAY) have struggled — increased from 4 million to 8 million over the past year, and revenue for the entire Asia-Pacific region rose 59% last year.
I’ve also been very impressed with the company’s growth record. From 2010-2014, revenue increased from $243 million to a whopping $2.2 billion. Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) rose from $47.9 million to $592.2 million, while total users more than tripled.
The next earnings report will come out at the end of this month, but for the first quarter, earnings were in line with expectations, although guidance came in weaker than expected. That resulted in a post-report selloff, but the lower outlook was because of transitional issues due to the company’s recent acquisition of Lynda.com (which sells corporate training videos) as well as other factors like an industry-wide decline in old-style display ads, the formation of product suites from standalone services taking a near-term hit on the top line, and a greater currency impact than management anticipated.
While these issues led to a significant “reset” of guidance, current estimates are certainly reachable and LNKD’s investments to secure future growth should pay off nicely. The company’s underlying fundamentals are still intact, so the lower prices are an opportunity to buy this stock at a discount.
We’ve seen high-growth names with dominant industry positions rebound nicely off dips over the past 12 months, and I expect a similar outcome for LinkedIn.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority.
