Do you really understand LinkedIn’s business strategy?

LinkedIn is transitioning from a career portal to a professional network, enriching its members with industry relevant content and professional office solutions.

On February 5, 2016, LinkedIn experienced its worst day since its high profile IPO on the New York Stock Exchange in 2011. The stock plunged as much as 46.5 percent to a three year low of 102.89 and the market value dropped by $11 billion (Reuters).

Investors punished LinkedIn due to its weak net revenues of $2,991mm compared to the forecasted range $3,600mm to $3,650mm (Reuters). Furthermore, the percentage year on year revenue growth was down 10% points from 45% 2014 to 35% 2015 (Both US and International markets). In particular international Marketing Solutions dropped from %y/y revenue growth of 38% 2014 to 12% 2015. As well as Premium Subscriptions that was down 20%points from 42% 2014 to 22% 2015 (both US and International markets).

“Stock price represents the market value of the future stream of earnings”

What is LinkedIn’s business?

LinkedIn is organized in 3 main revenue streams:

  • Talent Solutions
    Talent Solutions is the most known of LinkedIn products, and potentially what most users associate LinkedIn with. Under Talent Solutions exist the opportunity for Companies to create career pages, post job ads and look for suitable candidates with LinkedIn’s recruiter software. Talent Solutions represent 63% of LinkedIn’s total revenue and can be defined as the Cash Cow.
  • Marketing Solutions
    Marketing Solutions is LinkedIn’s ad service where you can buy text, display, InMail, and sponsored updates. An ad product similar to Facebook ads that allow clients to customize a message and display it on the site. The challenge that LinkedIn is facing with Marketing Solutions is LinkedIn’s limited repetitive page views that in comparison to Facebook or Google are relative low. In 2014, American users spend on average 42 minutes a day on Facebook, whereas LinkedIn was just 9.8 minutes (eMarketer.com).
  • Sales Solutions
    Sales Navigator is the latest product in LinkedIn’s portfolio and to most people an unknown service. The product is utilizing data from LinkedIn’s 414 million members to generate valuable leads and assist sales staff prospecting. The product is still considered to be in its infancy stage and has received mixed reviews. However, there should be great potential for Sales Navigator being one of the key streams for revenue in the future.

LinkedIn_Revenue Streams

From Job Search to Publisher

LinkedIn started out as an online network for professionals and have become the world’s leading portal for job seekers and recruiters. Talent Solutions has very much defined people’s perception and LinkedIn is now working hard to change that mindset to suit a broader value proposition.

People who is active on LinkedIn would have noticed a recent explosion in publications on LinkedIn. LinkedIn allows every single member to publish posts on his/her profile and lately LinkedIn has been hiring professional journalist from papers like the Financial Times and Huffington Post to enrich LinkedIn Pulse with professional content. This is all a part of a strategy to increase time spend on LinkedIn and transform LinkedIn from being perceived as a career portal to become a professional platform providing value on several different levels.

Where is LinkedIn headed?

LinkedIn has one of the world’s largest databases of professionals and LinkedIn has collected an unprecedented amount of data, which naturally can be utilized to offer a wide variety of professional service.  Among these services is the Sales Navigator tool that opens LinkedIn to a whole new segment of clients.

What investors should assess when valuing LinkedIn is LinkedIn’s move into new and more lucrative customer segments. My belief is that the general perception of LinkedIn as a career portal is heavily mistaken and valuing LinkedIn with that mindset is potentially myopic.

Is LinkedIn overvalued or not?

LinkedIn closed at $114.35 equal to Earning Per Share (EPS) of $-1.29, which indicate that it might not be the most attractive investment available. However, considering that the stock was trading at $200+ last year and now is trading at half price, despite no operational changes at LinkedIn, might indicate that investors do not fully understand the strategic transition driven by LinkedIn CEO Jeff Weiner.

LinkedIn_process

From a strategic position LinkedIn is currently only executing stage 2 of a 3 stage plan.

  • Stage 1 was to establish a member base of critical mass and ensure network effect, which LinkedIn achieved with its Talent Solutions products.
  • Stage 2 is to make LinkedIn widely valuable to professionals outside of job seeking and hiring. LinkedIn must attract more traffic and is with its services Pulse and Lynda competing in totally new territory.
  • Stage 3 is where LinkedIn will become profitable. Through professional services like the Sales Navigator sold to companies and enterprises. For stage 3 to succeed, Stage 2 must be a success. Only then will LinkedIn fully benefit from its 414 million members.