Based on my analysis, I expect LNKD to trade around $590, or at a 29% annualized return over the next 4 years, implying a 0.5x - 0.6x PEG ratio. The Company's continued use of Page views as a key metric constricts CPM. I believe the market underestimates and is overly cautious on the ramp for mobile, Sponsored Updates and Sales Navigator, even though successful precedents exist. Lastly and most importantly, the market does not account for additional revenue streams. As such, I believe LNKD can leverage its current data and other offerings to enter the $20bn+ human resource consulting industry.
Key Thesis Points
*The Company's use of Page Views as a measurement of user engagement is an irrelevant key metric, and it should rather focus on total minutes and minutes per user. CEO Jeff Weiner stated during an earnings call, the Company does not look at minutes because LNKD is a tool allowing users to be more efficient and effective in finding the necessary information. While some sell-side analysts have included data on total minutes and minutes/user, none make it a focus point. Morgan Stanley, for example, the lead underwriter on its IPO, has not mentioned minutes once in its published research in the past year. Marketers are likely to pay more as they understand how the Company offers its advertisements.
*The Market underestimates mobile ad revenue. Many sell-side analysts try to map LinkedIn's mobile advertising revenue ramp to Facebook's last year. This method ceases to account for the change in consumer trends and behavior of the past year. According to comScore data, average minutes a user spends on his/her mobile increased 70% to 4,132 minutes and a 52% increase specifically related to social media. According to Gartner research, smartphone sales also increased 46% y/y. Furthermore, email integration should further drive engagement because it's the most popular activity on a smartphone.
*The Market remains skeptical on LNKD's transition to Sponsored Updates, even though content advertisement should lead to a higher ROI for advertisers as it immediately allows advertises to reach its target market. Twitter launched Sponsored Tweets back in 2010 and has been awarded with strong success. Sponsored Updates are particularly useful for mobile where users are more engaged.
*Sales Navigator will have a higher ramp than anticipated as the platform will not just be a competitive advantage but will transform the sales force automation into a necessity, especially as LNKD leverages its platform and network effects. Mentions of Sales Navigator are usually followed with caution on how LinkedIn will manage the balance of user engagement and customer usefulness. I would argue users haven't noticed the difference from both experience and talking to about 15-20 friends and colleagues on LinkedIn. Similarly to Talent Solutions where passive members entertain other job opportunities, users contacted through Sales Navigator, even if they are not currently looking, can learn about new products for their business.
What the Market isn't Accounting for? Additional Revenue Streams
LKND could leverage its user base and platform to enter the $20bn+ human resource consulting industry adding significant value to enterprise customers as offerings can lead to a decrease in back office employees, or even eliminate it entirely. LNKD Robert Half has proven a combination of staffing services and human resources is a viable and profitable business model. I only accounted for compensation information in my bull case as a pricing power and additional feature for Recruiter subscriptions.
I value LNKD around $590 in 2017 based on 2018E earnings resulting in an annualized return of 28%. My primary analysis is based on 3 separate cases probability weighted concluding the stock still has significant upside over the next 4 years. I believe this is the most accurate and effective way to value the company due to the long-term horizon from significant current investments, which will materialize in several more years.
Additionally, I performed a best case segment-by-segment DCF analysis for the next 10 years and concluded LNKD is potentially worth $530 to $700 a share. While these are aggressive estimates, the valuation underlies the potential upside LNKD despite the significant risk. Furthermore, this analysis examines current revenue streams and does not account for new market entrance.
• Breakout of Sales Navigator revenues from Premium Subscriptions
• Expansion to enter additional revenue generating areas
• Strong revenue growth from mobile to ease the market's caution on revenue generation from Sponsored Updates
• The Company starting to use total minutes and average minutes/user to gauge user engagement
Risks & Mitigants
• Advertisements, including Sponsored Updates, decreases user engagement and usage of LNKD
o Facebook reported 5%, or 1 out of every 20, items is an advertisement in its newsfeed, which should be a strong indicator of what LNKD can accomplish
o Sponsored Updates
• Sales Navigator does not gain traction or decreases user engagement
o Initial feedback has been positive from users and is sub 10% of revenues