LinkedIn

With a global user base, a defensible business model and monetisation just getting started, professional networking platform LinkedIn presents an interesting investment opportunity, as Clay Smolinski, portfolio manager of the Platinum Unhedged Fund, explains.

Readers who have changed jobs over the last five years will likely be familiar with LinkedIn.  The LinkedIn profile has become the default on-line CV and the site is a good place to both search for a job and attract the attention of employers.

The recent sell-off in the global Internet names gave us an opportunity to take a closer look at some of the truly unique business models in the sector.  Facebook is a good example.  There are few consumer companies who control a product that is used by 1.2 billion people on a weekly basis.

In the space we are particularly interested in the companies that have built a global user base, have a defensible business model and are just getting started monetising their service.  When you have this combination, a high starting valuation doesn’t necessarily preclude them from being interesting investments.  A company that meets these criteria is LinkedIn.

Readers who have changed jobs over the last five years will likely be familiar with LinkedIn.  The LinkedIn profile has become the default on-line CV and the site is a good place to both search for a job and attract the attention of employers.  From its roots in recruitment, the site is evolving towards becoming a platform to showcase your professional brand and a place to curate, consume and share professional content – an acceptable social platform to be logged on during work hours!

A key asset of the company is the quality of data it has on its users.  Via filling out your profile you will typically provide your real name, current title, work history and educational background.  This is extremely valuable information in determining aspects like your salary, age, and professional interests.  Importantly, unlike a brand I may have ‘liked’ on Facebook a year ago, these are data points that are likely to hold their relevancy over time.  Combined with our attractive user demographic (usually the wealthier slice of the population), you can see why this database is attractive to advertisers and companies alike.

The quality of the database is evident when you consider where LinkedIn is making its revenue today.  Unlike the other social networks, LinkedIn is not purely an advertising driven model.  In fact 75% of revenue comes from database software products sold to corporates.  The value of a global database of professional identities is obvious to those looking to hire or those involved in sales trying to find the right contacts to speak to.

A historical weakness of LinkedIn has been user engagement.  Indeed early adopters will likely remember the site being fairly bare - after filling out your profile you might answer the odd connection request, check out who’s been viewing your profile and not much more.  Like many Internet companies the management is working hard to make a visit to LinkedIn part of a user’s daily routine.

Users can now follow their favourite news sources (i.e. The Economist), or track what their favourite business luminaries are saying via the LinkedIn Influencers program.  A further extension has been the decision to give individual users the ability to write their own blog posts, which will appear on their profile.  In a similar vein to twitter, users who are posting articles can be ‘followed’ allowing you to keep track of what interesting folks are writing without needing to formally connect.  These features combine to allow one to design an interesting daily news feed and give one another reason to sign in.

The company has now achieved global scale.  LinkedIn has over 300 million accounts in total and new users are joining at a rate of 8 million per month.  Similar to Facebook, LinkedIn has tended to displace local competitors over time and it is now clearly the dominant professional network globally, holding leadership positions in every major market outside of Germany and China.

LinkedIn currently has a market cap of $20 billion, and the Platinum Unhedged Fund did some good buying at the crescendo of the recent sell-off to build a starting position.  However, with the company expecting to earn $2.2 billion in revenue this year, it is important for it to continue to improve engagement to fully monetise its three revenue streams.

There are a few factors supporting future revenue growth.  Firstly, two of their major product categories, the database software subscription targeting sales reps and the ‘sponsored update’ advertising product, are still in their infancy in terms of roll out.  Secondly, as the customer base is global, the end markets are huge.  Finally, LinkedIn has what we would describe as a contributory or ‘user generated’ database business.  These businesses, where companies effectively collect data from users for free and resell it, tend to be highly profitable once revenue scales.

DISCLAIMER: The above information is commentary only (i.e. our general thoughts). It is not intended to be, nor should it be construed as, investment advice. To the extent permitted by law, no liability is accepted for any loss or damage as a result of any reliance on this information. Before making any investment decision you need to consider (with your financial adviser) your particular investment needs, objectives and circumstances. The above material may not be reproduced, in whole or in part, without the prior written consent of Platinum Investment Management Limited.