Author: Barry Randall, Crabtree Asset Management
February brought with it the quarterly re-balancing of the Crabtree Technology model. We take this action every three months as part of the discipline in our investment process. We sell those companies no longer demonstrating our preferred characteristics of cash generation, market share gains and operational and financial execution. And we replace those companies with those that our quantitative model determines are demonstrating those preferred characteristics.
It was also during February that we had a chance to fully analyze two high-profile technology companies: LinkedIn (LNKD) and Zillow (Z). And as it turns out, we ended up investing in one of them. First let me describe each and then see if you can guess which one we bought.
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LinkedIn and Zillow actually have a lot in common. Both have software-as-a-service business models. Both are enjoying triple digit revenue and subscriber growth rates and are converting these tailwinds into profits. Both went public in 2011 in high-profile, "low-float" IPOs.
Each company is exciting in its own way. LinkedIn has a wonderful, "Trojan-horse" strategy, converting what early subscribers thought was simply a professionally-oriented social network into a hugely successful human resource tool. Over half of LinkedIn's revenue comes from selling access to its database of 155 million professionals to corporations that can easily search for potential hires.
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And Zillow exploits the eternal curiosity of people wondering what their own home is worth, as well as their neighbors'. More than half of Zillow's revenue comes from real estate agents who subscribe to Zillow's Premier Agent program. This program gives those agents preferred advertising and marketing positioning on Zillow's web site, as well as on mobile devices, which now account for one third of the homes viewed.
LinkedIn seems to be moving from strength to strength. In late February, Monster Worldwide's (MWW) CEO announced that the job-search web site was considering "strategic alternatives" -- that is, putting itself up for sale. Not sure what other alternatives exist for Monster, with its share price down by 60% in the last year as LinkedIn and other social network sites eat it alive.
Considering that Monster is still quite profitable, it seems somewhat harsh for its stock (with a forward price:earnings ratio of 24) to have fallen by nearly two-thirds. But that's how powerful perception is: LinkedIn has the better business model, so they get the love. And a forward P:E of 121.