It’s been six weeks since Microsoft Corporation (NASDAQ:MSFT) closed its $26.5 billion acquisition of LinkedIn, the largest deal ever made by the Seattle tech giant. Since the acquisition was announced in June 2016, there have been plenty of opinions surrounding the steep price paid for the business networking site — some positive, some negative — and those question marks will continue to follow Microsoft and MSFT stock until LinkedIn is able to pay its own way.
I’m a fan of Microsoft stock — in late December, I predicted it would hit $80 in 2017 — so I’m definitely rooting for LinkedIn to keep delivering the goods as it did in its Q3 2016 earnings, its last report as an independent company.
Its $1.18 earnings per share on a non-GAAP basis — 27 cents higher than what analysts were expecting — on $960 million in revenue was a major victory for LinkedIn which also saw memberships grow 18% to 467 million compared to the same quarter a year earlier. Most important, it actually made a small GAAP profit of $9.1 million in the quarter.
MSFT is on a roll, but it will have to maintain momentum if it’s going to have any chance of extracting future shareholder value of $26.5 billion or more over the next few years.
Sure, the LinkedIn acquisition is about more than money, but ultimately that’s one of the key criteria for evaluating a deal’s success or failure.
Here are the three things I believe will make the LinkedIn acquisition a success.
Estimated Monthly Users
While LinkedIn is considered the top social media site for business networking, it has just 106 million monthly active users (MAU) out of 467 million members. Facebook Inc (NASDAQ:FB) has almost 18 times that, with its 1.86 billion MAU.
Microsoft might have plans for LinkedIn that go beyond its user numbers but it’s got to keep pushing the MAU metric higher because Facebook’s not going to stop growing its user base, especially when it comes to helping people find and secure new jobs.
LinkedIn isn’t going to capture anyone but the high-income segment of the workforce; currently, 45% of those earning more than $75,000 use LinkedIn. That’s got to be higher.
Mobile Is Key
Nielsen’s 2016 Social Media Report released in January offered a really deep dive into the world of social media including mobile usage. Drawing data from 9,000 smartphone users 18 or older, Nielsen was able to determine the number of unique mobile users for the top 10 social media platforms; Facebook had 178.2 million unique users compared to 60.1 million for LinkedIn or just three times the number.
If LinkedIn wants to capture a bigger social media audience, especially younger business professionals, it’s going to have to get very smart about its mobile game plan which it appears to have done delivering a revamped mobile site in 2016.
“We are seeing good results with the core experience, with our revamped mobile app driving significant engagement growth in 2016,” Microsoft CEO Satya Nadella said during the company’s Q2 2017 conference call. “This quarter, the sessions on LinkedIn grew more than 20% year over year, a consistent level of growth throughout 2016. We also achieved record levels of mobile page view.”
The best thing Microsoft has done to date regarding its purchase of LinkedIn is promoting Kevin Scott to chief technology officer for the entire company. That suggests that Microsoft didn’t just buy a great networking site but also got a lot of talented people including Scott, who, in addition to his existing roles at LinkedIn will lead Microsoft’s technology plans as well.
As CTO, Scott will be empowered to continue to help grow Microsoft’s cloud business by bringing it together with LinkedIn’s network of professionals. Analysts see Microsoft’s cloud business growing by 33% annually over the next three years and accounting for 30% of Microsoft’s overall revenue by the end of fiscal 2019.
Often, when companies merge, the two businesses have vastly different corporate cultures creating turf wars between the different organizations. While early in the transition it appears that Nadella is very concerned about successfully integrating the LinkedIn team.
Should this attitude remain, Microsoft’s got a great chance at reaping the rewards necessary to recoup its investment.
Bottom Line on MSFT Stock
Obviously, it’s way too early to assess the success or failure of the LinkedIn acquisition.
However, looking back at the last five fiscal years, LinkedIn’s best showing in terms of profitability was in 2012 when it had $56.9 million in operating profits on $972.3 million in revenue for an operating margin of 5.9%.
If Microsoft can get LinkedIn to that operating margin within five years, it will be generating approximately $354 million in operating profits on $6 billion in revenue (15% CAGR), a good start on the way to repaying the $26.5 billion.
These three points will certainly help.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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