the bull and bear case for linkedin

The Bull and the Bear case for

The World's Largest Professional Network

Invest in yourself, invest in your network, and invest in society. When you investin all three, you have the best shot at reaching your highest professional potential. As important, you also have the best shot at changing the world. – Reed Hoffman, Co-founder, LinkedIn

Reid HoffmanEntrepreneur. Product Strategist. Investor.San Francisco Bay Area InternetCurrent Greylock, LinkedIn, WrappPrevious College Eight, UCSC, Six Apart, TaggedEducation Oxford University

LinkedIn is the world’s largest professional network on the Internet with more than 200 million members in over 200 countries and territories.

• LinkedIn recently celebrated 10 years of business.

• Started in 2003 with 14 employees. Now has 3,779.

• LinkedIn added 57 million new members in 2012.

• Total revenue increased 86% in 2012 to $972 million.

Household income of LinkedIn’s US Members is twice the average.

Source: LinkedIn

Nearly 150 million members are outside the US.

Source: LinkedIn

Used by 50% of Fortune 100 Companies.

Source: LinkedIn

LinkedIn has three revenue sources:

Source: 10-Q for Period ending 3/31/13.

The Bull Case for LinkedIn

• Hyper-growth in all areas.

Adding Over 2 new members every second.

Hyper-growth in all areas.

Sales have risen at a compound annual growth of 95% over last 2 years.

Hyper-growth in all areas.

In last 2 years, number of corporate customers has also increased at a compound annual rate of 95%.

Hyper-growth in all areas.

The Bull Case for LinkedIn

• Profitability has been growing since IPO in May, 2011.

TTM gross margin has grown to 87.1%.

Profitability growing.

TTM CFO has dwarfed TTM net income.

Profitability growing.

Growth in TTM CFO/share accelerated to 104% during the last 12 months.

Profitability growing.

TTM FCF/share has been positive since the IPO and is growing.

Profitability growing.

The Bull Case

• Market potential is substantial.

LinkedIn is just getting started.

• CEO Jeff Weiner estimates its immediate addressable market is $27 billion; long-term it’s $80 billion.

• Trailing twelve month sales just $1.1 billion or 4% of its immediate potential market.

• Half the Fortune 100 are potential customers.• Just 2.6 million small and medium enterprises have free company pages.

There are 5.91 million small businesses in U.S.

Substantial market potential.

• January 2013 WSJ survey showed 40% of small businesses found it valuable.

LinkedIn's popularity is growing with small businesses.

Substantial market potential.

Small businesses are a large, relatively untapped market.

• The SBA considers small businesses those with less than 500 employees.

• 99.7% of all employer firms in the US are small businesses.

• 52% of Americans work for small businesses.

Substantial market potential.

The Bull Case

• Bold enough to manage for the future even in the early days.

Recognized inadequacies of hardware in late 2011 and fixed problem at expense of short-term sales.

• Growth was taxing hardware.• In November 2011, froze development of new features to improve

robustness and capacity of infrastructure.• Talent Solutions revenue per customer dipped to all time low for Q4 2011,

just 7 months after IPO.

Manages for future.

Decision was the right one for all stakeholders.

• Talent Solutions sales per customer has risen from $9,196 to $10,159.

• Share price has risen 184% during same period.

Manages for future.

Talent solutions revenue per customer now at all-time high and growing.

Manages for future.

Stock price fell to lowest level in late 2011, but has recovered nicely.

Manages for future.

Price jumped 21% on February 8, 2013 after announcing Q4 2012 EPS that crushed estimates and raising guidance.

The Bull Case

• Expanding internationally and sales per employee higher than in US.

More members outside US than inside

• Two-thirds or about 150 million members are outside the US, showing international appeal.

• LinkedIn's site is now available in 19 languages.

Expanding internationally.

International sales per employee continue to outpace domestic sales per employee.

Expanding internationally.

The Bull Case

• Stickiness + Innovation.

Capturing members’ attention.

• Blogs from "Influencers.“ Virgin Founder Richard Branson has 1.9 million followers.

• Pulse. A recently acquired the popular newsreader for the web and mobile.

Very innovative.

Adding features to help expand members' networks.

• Encouraging members to add additional connections.

• Also a "People You May Know" feature based on people your connections know.

Very innovative.

Added "Groups" to engage members in community discussions.

• Groups are comprised of people with similar employment and educational backgrounds.

• A great way to expand your network.

Very innovative.

Adding new feature to allow members to transform their profiles.

• Gradually releasing feature so members can add samples of their work to their profiles, including video.

• Will transform profile to a digital, interactive portfolio.

Very innovative.

Recently introduced new version of "LinkedIn Recruiter."

• New version easier for recruiters to use and even suggests people to hire which searches may not have found.

• Goals are to keep recruiters on the site longer and make their time more productive.

Very innovative.

LinkedIn Actively Encourages Employees to Innovate

• It has a program called the "Incubator."• Employees pitch ideas and those

accepted are assigned important mentors, including Reid Hoffman.

Very innovative

The Bull Case

• Management's wealth tied up in LNKD stock.

Management's wealth is heavily tied up in LNKD stock.

Management feels your pain.

Market value based on 5/31/13 closing price and amount of super-voting Class B stock held.

The Bull Case

• Hyper-growth in all areas.

• Profitability has been growing since IPO in May, 2011.

• Market potential is substantial.

• Expanding internationally and sales per employee higher than in US.

• Stickiness + Innovation.

• Management's wealth tied up in LNKD stock.

• Total Shareholder Return (TSR) since IPO exceptional.

Very successful IPO.• IPO was priced at $45/share on 5/18/11.• First public sale was at $83/share on 5/19/11.• Stock closed at $94.25 on first day of trading,

up 109.4% above its IPO price.

Excellent TSR.

Total 2-Year shareholder return is exceptional.

• LinkedIn stock has gained 120% in 2 years for those who bought at the opening market price of $83.

• For those lucky enough to get in at the $45 IPO price, their gain is 305%.

Excellent TSR.

The Bear Case

• Growth rates are slowing in all areas.

Member growth has slowed. Last year, growth averaged 8% vs. peak of 14% in 2011.

Growth rates are slowing in all areas.

Sales growth peaked in the first full quarter after the IPO and has fallen ever since.

Growth rates are slowing in all areas.

Rate of growth of corporate customers has been steadily declining.

Growth rates are slowing in all areas.

The Bear Case

• Reputation depends on increasing membership and members' completing and updating their profiles.

In the drive to increase membership, little information is required to join.

Dependent on number & quality of profiles.

• CFO Sordello justified recent price hike by the doubling of its membership to 200 million.

• Entering just your name, job title, location and industry makes you a member.

• While counting as a new "Registered Member," how valuable is a skeleton profile to customers?

Passive candidate recruiting is key to customers who need comprehensive data.

• From Q1 2013 10-Q:–If our members do not update their information or provide accurate and complete information when they join LinkedIn or do not establish sufficient connections, the value of our network may be negatively impacted because our value proposition as a professional network and as a source of accurate and comprehensive data will be weakened.

Dependent on number & quality of profiles.

Content difference between "Profile Strength" levels is small.

• LinkedIn has 6 "Profile Strengths": "Getting Started," "Beginner," "Intermediate," "Advanced," "Expert" and "All Star."

• Entering your name, title, location and industry ranks you as "Getting Started." A title of "Retired" is sufficient.

• Two skills, one job and one school with the dates of attendance qualifies as "Advanced."• Adding one more job and skill, raises rank to "Expert."

Dependent on number & quality of profiles.

Sales & Marketing personnel surpassed product development shortly before IPO and has continued to grow.

Dependent on number & quality of profiles.

Quantity appears to be important than quality.

• LinkedIn's revenues are primarily dependent on the number of "Registered Members" so increasing that number is paramount.

Dependent on number & quality of profiles.

The Bear Case

• Most metrics don't measure effectiveness of its service.

3 of the 4 metrics reported are “vanity metrics."• Registered members, page views and unique visits are good for headlines.• Analytics company Mixpanel and its investor Andreessen Horowitz instead

suggest informative measures of retention and engagement.

Most metrics don't measure effectiveness.

Company admits that a “substantial majority" of members don't visit even monthly.

• Q1 2013 10-Q states:• The number of our registered members is higher

than the number of actual members and a substantial majority of our page views are generated by a minority of our members.

• Further, a substantial majority of our members do not visit our website on a monthly basis...

Most metrics don't measure effectiveness.

Number of registered members and unique visits not indicative of broad activity.

•According to quantcast:•1% of LinkedIn's global users ("Addicts") account for 31% of all

visits.•64% of its global users are "Passers-By," visiting just once a

month. (LinkedIn counts even non-members in Unique Visits.)•Not known: What percent of members don't visit even

monthly?

Most metrics don't measure effectiveness.

Less than 1% of registered members are paying members.

• Last quarter, LinkedIn reported $65.6 million in Premium Subscriptions and 218.3 million members or $0.30/member in paid subs.

• Since the cheapest sub is $25/month or $75/quarter, there are at most, 0.9 million paying members or 0.4%.

• Few members appear to find the service worth paying for.

Most metrics don't measure effectiveness.

Metrics which Would Measure the Company's Effectiveness

• % of registered members with paid (not trial) premium subscriptions (Netflix discloses this information).

• % churn in premium subscribers and talent solutions customers. • Number of members who landed a job via LinkedIn.• % of Talent Solutions customers who hired a member.• % of Page Views which led to reading ads (spending at least 10 seconds

on the ad to eliminate errant clicks).

Most metrics don't measure effectiveness.

The Bear Case

• Demographics suggest US market nearly saturated.

US labor force participation rate (LFPR) is continuing to fall.

• As of March, 2013, only 63.3% of those aged 16-64 were employed or looking for work--about 125 million people.

• 90 million Americans were unemployed and not even looking for work.

US market nearly saturated.

According to BofA economist Michelle Mayer, the decline in the LFPR Is due to two factors.

• Half the decline is due to aging population (the red line).

• The rest is due to a weak economy and more young people opting for school vs. work.

US market nearly saturated.

Demographics not encouraging for LinkedIn with 77% of its sales dependent on hiring.

US market nearly saturated.

LinkedIn may have saturated the US market for workers with college degrees.

• According to quantcast, 57 million members (76%) have at least a college degree and 82% of members are at least 25 years old. If 82% of the college grads are 25+, that would be 46.7 million members.

• For April, 2013, the BLS reported 49.5 million college grads age 25 and higher in the civilian work force.

US market nearly saturated.

The Bear Case

• Absent major changes, potential is limited.

What is LinkedIn's downside?

• Weiner estimates its immediate addressable market at $27 billion and $80 billion long term.

• Latest TTM Sales were $1.1 billion.• For Q1 2013, the rate of growth in TTM sales YoY declined 28.1%

from 100.6% to 72.3%.• How much will growth decline from here?

Potential limited.

How should we consider LinkedIn's potential market?

• Weiner said there are 3.3 billion workers in the world. But, how many are LinkedIn candidates? A fraction.

• In 2010, average world household income was $9,218.• In 2012, the International Labour Organization calculated average world wages in Purchasing

Power Parity (PPP) dollars (what $1 buys here):• Average world wage was $18,000.• Only 31 countries had incomes above the average: 19 in Europe, US, Canada, S. Korea,

Singapore, Japan, Hong Kong, Australia, New Zealand, S. Africa, Israel, Turkey and Qatar.

Potential limited.

LinkedIn's Focus on Doing Just One Thing Well May Limit Growth

• In a recent interview with Bloomberg West, co-founder Hoffman said the lesson he learned from his 90's experience with SocialNet was:

You should focus on one domain that really matters to people and do that domain really well, as opposed to a platform across all of them.

• Where Amazon would be today if Jeff Bezos had insisted on focusing on just selling books?

Potential limited.

The Bear Case

• Increased use of mobile devices may cut into income.

Smartphone screens are small.

• The usable area on a smartphone screen is nearly 10 times smaller than the smallest PC, reducing the space for ads.

• 27% of LinkedIn's sales come from ads• Other companies have seen income drop with increasing adoption

of mobile.

Shift to mobile may reduce sales.

The Bear Case

• Valuation appears frothy.

•Its gross margin is just 21% more than Facebook's, but its price/sales is 57% higher.

Is LinkedIn worth it?

Valuation very high.

LinkedIn's financial performance may not justify its Price/Sales vs. Google and Facebook

Valuation very high

•Facebook, Google and Amazon employees outsell LinkedIn's by 2.4 to 3.8 times.

Do LinkedIn employees generate more sales? NO

Valuation very high.

Bull vs. Bear bottom line.

LinkedIn is a very profitable company with:

• a gross margin of over 87%.

• TTM CFO which continues to dwarf net income.

• TTM FCF which has been positive since its IPO and continues to grow.

• Stock is up 184% since low in 2011.

Bull vs. Bear Bottom Line

But, its Price/Sales ratio is still very high at 17 compared to historical peaks of companies like Amazon, Google and Netflix.

Bull vs. Bear Bottom Line

LinkedIn has the advantages of a first mover, continues to grow and innovate and currently has little competition. Only time will tell whether its best days are ahead or over.