LinkedIn Is a Buy on the Pullback

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LinkedIn's  growth has been extraordinary this year, and the company's stock price has followed suit. But, the company swung to a loss in its most recent earnings report, leading to a sell-off. The company's moat is growing and its revenue should increase substantially down the road. 

Global growth prospects
The professional networking giant, LinkedIn, is hitting revenue growth estimates out of the park. The company's member base has surged to 259 million, a 38% increase from last year. Professionals outside the U.S. now make up roughly 66% of LinkedIn's total membership count. LinkedIn has more growth room for its member base relative to social media giant Facebook .

LinkedIn's member count should be better than Facebook's in the near future. Facebook's 1.2 billion monthly user-base will make it more difficult for the company to grow rapidly in the future. Also, LinkedIn has more stable subscription revenue relative to Facebook as well.

LinkedIn's management pointed to an estimate of 600 million professionals across the globe, and indicated that the company's growth in its user base should increase in the future. In the longer term, LinkedIn's management hopes that the 3 billion+ people in the global workforce build a profile on LinkedIn. 

LinkedIn's penetration is a lot lower in emerging markets like Brazil and India, but should pick up in the future. LinkedIn recently crossed 15 million members in Brazil, making it the third-largest LinkedIn market behind the U.S. and India. LinkedIn's prominence should grow further as more than 3 million companies across the globe have Company pages on its platform, utilizing the company's online services to enhance their respective brands and recruit talent. In addition, LinkedIn has only 3 million members in China, but still operates in English and may consider localizing its platform down the road.

Investing heavily to develop its platform
LinkedIn's top-line revenue increased to $393 million, which is a 56% increase from a year ago. LinkedIn's adjusted EBITDA for 3Q stood at $93 million, which points to an adjusted EBITDA margin of 24%.

LinkedIn swung to a loss in Q3, but the company's engagement metrics are stellar, with page views growing 30% to 11.6 billion. LinkedIn's cash balance surged to $2.3 billion after the company tapped the ongoing bull market to raise $1.35 billion through a follow-on equity offering. 

LinkedIn is spending a lot of money to grow its top line. It is investing heavily in ramping up its sales force and growing corporate clientele. In the last quarter, LinkedIn added more than 1,700 corporate clients, bringing its total corporate customer count to more than 22,000. LinkedIn's enterprise customers now account for roughly 90% of all posted jobs.

This growth in corporate customers is reflected in the company's deferred revenue growth of $335 million. In the future, customer payments will flow through the company's income statement. 

Additionally, LinkedIn has ramped up its investment in R&D to develop newer products that keep users engaged, as well as come up with new solutions to better serve clients. LinkedIn's recent products, like Endorsements and its Publishing platform via Influencers, have been very successful in keeping users actively engaged and returning to the company's webpage. LinkedIn is also driving up efforts to make its platform indispensable to university students by offering resources to help launch their careers.

Recruiting dollars
In Q3, LinkedIn's revenue from the talent solutions business made up 57% of total revenue. The division grew sales an impressive 62% to $225 million. LinkedIn launched a number of new mobile products to enable corporate customers to recruit and reach out to prospective candidates to fulfill hiring needs.

The market solutions business is still in its early innings and has a lot of room for growth. Revenue from the marketing solutions and advertising business stood at $89 million, a 38% increase from a year ago. This advertising business made up 23% of total LinkedIn revenue in Q3. LinkedIn recently launched Sponsored Updates, which is an advertising product that delivers relevant content to customers on both mobile and desktop.

On the earnings call, LinkedIn's CEO stated that the company's click-through rates on sponsored content increased by 33% from desktop users. Sponsored Updates is doing well, but is a small portion of marketing dollars. Mobile is driving two-thirds of sponsored updates revenue due to higher click-through rates on smartphones and tablets. 

The company's premium subscriptions business is also doing very well. The segment had revenue of $80 million in Q3, representing a 61% year-over-year increase. In the premium subscriptions business, the Sales navigator product has room for growing revenue because there are a lot more sales professionals on LinkedIn compared to recruiters.

Going forward
LinkedIn's main revenue engine -- the online recruitment business -- doesn't have many formidable competitors. In particular, the company has pointed out that the addressable market in the online recruitment industry is $27 billion, which translates into years of double-digit top-line revenue growth.  Also, LinkedIn's presence in the massive online advertising business is still in its infancy. 

As a result, LinkedIn's ability to develop more compelling advertising products for customers on mobile will be crucial for future advertising revenue. LinkedIn's social media counterpart, Facebook, has a phenomenal footing on monetizing its user-base on mobile. LinkedIn can possibly emulate Facebook's monetization strategies and grow its top line even more. The sell-off on LinkedIn stock is a great buying opportunity for long-term and astute investors.


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The article LinkedIn Is a Buy on the Pullback originally appeared on

Ishfaque Faruk owns shares of Facebook. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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