It wasn’t that long ago that social media companies were considered to be the “next big thing” — and a huge investment opportunity.
Facebook (NASDAQ:FB), for example, counted 900 million active users just prior to its IPO, up to 85% of them logged on daily, the average user was spending 6.5 hours monthly on Facebook and membership was growing steadily. Current darling Pinterest — the fastest-growing social media site in history — uses Amazon (NASDAQ:AMZN) Web Services for minimal infrastructure investment and employs just 35 people.
Social media companies have comparatively modest operational expenses, tons of users and explosive growth. What’s not to like? Yet of the half-dozen big social media IPOs of the past year, LinkedIn (NYSE:LNKD), stands alone as a resounding success, while others — including Facebook — have been investment duds.
What is LinkedIn doing different from the others? Is it sustainable, or is this a blip before the company joins the ranks of the social media letdowns?
First, a quick overview of six of the big social media companies that went public since 2011, including their IPO price and how their stock has performed since:
(Gain over ipo)
(gain over ipo)
|5/19/11||$45||$95.25 (+109%)||$96 (+114%)|
|3/2/12||$15||$24.58 (+64%)||$18 (+18.5%)|
|5/18/12||$38||$38.23 (+0.6%)||$20 (-47%)|
|12/16/11||$10||$9.50 (-5%)||$2 (-78%)|
|Groupon||Daily deals||11/4/11||$20||$26.11 (+31%)||$3 (-85%)|
|Pandora||Internet radio||6/15/11||$16||$17.42 (+9%)||$7.79 (-51%)|
Given the generally disappointing performance of these companies, has LinkedIn found a formula the others are missing? It’s not only profitable, but it has beat analyst expectations repeatedly (including once again in this quarter) and is posting large revenue increases — up 81% in Q3. Its subscriber base continues growing at a strong clip, with membership now at 175 million.
Here are a few of the things LinkedIn does that have contributed to its success:
- Rather than a single line of business, LinkedIn has developed three core revenue streams.
- LinkedIn’s free membership offers enough value to be worthwhile (ensuring high traffic and membership growth), but its premium offering is a significant enough upgrade that people are paying for it; with membership comes a highly valuable database that corporate clients are then willing to pay to gain access to.
- The company has been aggressive with product development, continually pushing to add value and has successfully pursued mobile users.
- The nature of Linkedin’s membership — skilled professionals and recent college graduates — means high demand for advertising on the site.
While other social media companies still are trying to figure out how to convert users to revenue (without driving the users away), LinkedIn has it figured out. And while the typical social media model tends to focus on revenue from a single stream (usually advertising, as it’s the most passive way to earn cash from a fickle user base) LinkedIn’s multiple streams — ad revenue, multi-tiered paid personal membership upgrades and corporate subscriptions (recruiters and sales professionals) — reduces reliance on any one source of income, protecting it against softness in any of those markets.
LinkedIn’s business focus and resulting user base — professional rather than casual — also has proven advantageous in driving its advertising revenue stream. While Facebook users are all over the board in terms of demographics, LinkedIn members are likely to have money. In a CNET profile, a BIA Kinsely analyst describes the LinkedIn users as “an incredibly rich audience — exactly the demographics you want to advertise to.”
The company has set itself up for sustained profitability; however, that doesn’t mean it can sustain current levels of growth and continue to justify its high stock valuation. As Tom Taulli points out, the key to maintaining that high flying stock price likely lies in acquisitions.
Growing its user base at the pace it has maintained over the past year will be difficult. Every social media site hits a plateau where new membership levels off; LinkedIn enjoyed double-digit quarterly increases in new users, but that’s recently begun to taper off into single-digits.
In addition, rivals are beginning to pop up. Viadeo, a European competitor, has 45 million users, claims to be adding 1 million more a month and recently secured $32 million to fund expansion in China and other emerging markets — the same areas LinkedIn is looking for growth — as part of a 100 million users by 2013 target. BranchOut, a professional networking Facebook app, is claiming 25 million users. Competition means the potential for further slowing in LinkedIn membership numbers, pressure on ad revenue (since advertisers can hit the same target demographic elsewhere) and pressure on those premium, paid memberships.
Buying a Monster Worldwide (NYSE:MWW) or similar company would undoubtedly make Linkedin stronger overall, but I just don’t see a scenario where current growth rates are maintained in the long term — and that expectation seems to be what the current stock price reflects.
Long story short, I think Linkedin has a good prospects, but I think its stock is significantly overvalued at $96 — and a P/E in the triple digits would seem to bear that out.
From an investment perspective, the trick will be knowing when to get out, because I really do believe the stock has potential for at least a little more run in the short-term. However, any bad news could quickly bring LNKD back to earth.
If you’re sitting on a pretty gain, consider taking your chips and exiting — or if you want to ride it out a little longer, set a stop-loss to ensure you keep some of your returns. If you’re not in already, though, the risk might not be worth the modest rewards.
As of this writing, Brad Moon did not hold a position in any of the aforementioned securities.