As referenced in one of my recent blogs, the problem LinkedIn has been facing in its high market valuations stems from comparisons of its revenue model to those of Facebook and Twitter. As this chart comparing ten tech stocks shows, two analyst downgrades within 3 weeks and S&P's downgrade of U.S. bonds have combined to kick LNKD into the basement.
(Disclosure: I do not hold any position in LNKD.)
While the revenue model may be similar (based in good measure on display advertising) both the usage and the expected eyeball traffic are very different.
LinkedIn's potential and financial performance should not be judged by the same standards applied to Facebook and Twitter.
Unlike the broad market appeal of Facebook (especially) and Twitter, LinkedIn caters to a niche market - business networking and job-seeking. Aiming at a narrower market is not a bad thing. It just means fewer potential eyeballs. Further, LinkedIn has no need to be a forum for posting photos of the family vacation, or ranting in 144 characters about the economy.
Investors want bang for the buck. But they should carefully examine LinkedIn’s potential for growing revenue relative to the cost of securing and maintaining it long term. LinkedIn will never be the size of Facebook - by any nominal measure. They need to examine the return, and the prospects for maintaining or improving that return long term - just as they would for any stock.
Likewise, advertisers want bang for the buck, too. Their interests are best served when they identify their targets, and use media that deliver terrific payoffs in reaching and influencing those targets. They should understand the payoff matrix that LinkedIn delivers for their ad dollars, and decide on that basis.
A huge leap in the share price of LNKD didn’t suddenly make it a ‘must buy’ for advertisers. The past week’s decline doesn’t render it a poor advertising choice, either.
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