LNKD Takes It on the Chin

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.

 

 

LinkedIn Feels the Pain

It’s an unfortunate coincidence for LinkedIn that reporting for its first Quarterly Earnings Release since its May IPO should occur during the Debt Ceiling fiasco in Washington, this week.

The combined body blows from the government wrangling, poor U.S. employment and consumer spending reports, and unease over Spain and Italy in the EU have sent stocks tumbling.  Add to this Wall Street’s sensitivity to SEC wrath by ensuring that ratings by their analysts are not influenced by the underwriting department.  It’s a volatile mixture.

Yesterday, it added up to some bad news for LinkedIn: Morgan Stanley joined JP Morgan Chase in downgrading LNKD.  That both MS and JPMC were major underwriters of the LinkedIn IPO in May makes the news sting.  LNKD has now dropped 17% since JPMC issued its downgrade mid-July.

As I blogged yesterday, the real issue in the minds of the market is LinkedIn’s ability to achieve the long term revenue growth implied by its stock valuation.  I don’t think the outlook is at all shabby.  Like it or not, though, LinkedIn is being compared to Facebook and Twitter - especially when it comes to advertising revenue generation.

Yes, they are all social media.  Yes, paid advertising is a large revenue source for them.  And perhaps the stock valuation has been made against the wrong standard.  However, LinkedIn’s target market and its offerings are more narrowly focused than those of its two companions.  This doesn’t make it bad to own as a stock, and it doesn’t make it a poor choice for advertisers.

What's Up With LinkedIn?

What’s up with LinkedIn?  Revenue, profits and membership, for starters.

LinkedIn’s first quarterly earnings report (August 4) since its May IPO showed an unexpected profit (4 cents a share), Y/Y revenue up 120% and membership up  61%.  As industry observers are most interested in its long term guidance, the company projected full year revenue of $475 million. 

Will LinkedIn fall short of long term expectations?  A look at its subscriber base may shed some light.  Market researcher Lab42 surveyed LinkedIn subscribers in July 2011.  Lab42 looked primarily at two things: what they use it for, and how often they use it.  

Here’s the primary use among LinkedIn subscribers:

Next, here’s the frequency of access:

 

However, here’s what I suspect is making Wall Street analysts cautious.  LinkedIn’s slides show reveals that in 2Q11:

• 82 million unique users performed 7.1 billion page views.  
• Subscriptions accounted for 20% of revenue, marketing solutions for 32%, and hiring solutions for a whopping 48% of revenue.

LinkedIn is a Rolodex, contact management aid, and prospect finder all rolled into one - and it’s a pretty good one at that.  But it’s nothing compared to the scale and variety of use of Twitter or Facebook (graphic below).  In short, there’s simply a much broader offering, larger user base, and a lot more going on at any time in both Twitter and Facebook.

It’s a simple matter of economics.  For advertisers, reach and frequency continue to be the Holy Grail.  Twitter and Facebook offer more of both.  That is why they are the better bet for attracting long term ad revenues.

LinkedIn will prosper, but the Wall Street calculus - driven by the voting of advertising dollars - favors higher market capitalizations on both Facebook and Twitter.