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Should You Invest In LinkedIn Corporation (LNKD) After Recent Rally?

 February 11, 2013 02:36 PM


(By Mani) LinkedIn Corporation (NYSE: LNKD) is a stock to look for in 2013 due to its strong growth potential as it is turning out be a leading employment site. But, the stock should consolidate, given a lack of catalysts.

Founded in 2003, LinkedIn is a social professional network. Through its platform, members can create, manage, and share their professional identity online while finding business opportunities, building their professional networks, connecting with business contacts, and finding potential employees/employers.

California-based, LinkedIn has more than 200 million members and is replacing job boards and other sources while emerging as the go-to source to find employees – something which should propel strong growth for the foreseeable future.

[Related -LinkedIn Corp (LNKD) Q1 Earnings Preview: Traffic Troubles?]

The company invested over the past year in developing new products that have led to higher user engagement and better advertising opportunities. LinkedIn is slowly rolling out its mobile monetization plans and is ahead of the game in distinguishing between tablet and smartphone, creating different strategies for both.

The company gets revenue from talent, marketing and premium subscriptions. Talent solutions, which accounts for 50 percent of its revenue, includes the largely self-service LinkedIn Job Slots and the LinkedIn Corporate Solutions suite, which includes the Talent Pro and Job Seeker subscription products. The solutions are built to be an effective way for enterprises and professionals to find, contact, and hire the best qualified candidates.

[Related -LinkedIn Corp (LNKD): Can Price Overcome Costs?]

Marketing solutions represents 30 percent of revenue, enables advertising agencies and direct marketers to use display and text ads on LinkedIn to reach a targeted audience. LinkedIn Ads is a self-service platform that allows marketers to create and place ads directly while LinkedIn Ads for Enterprise provides dedicated account management and additional marketing solutions.

"In Marketing Solutions, we believe the distinction between tablets and smartphones and a focus on "content marketing" show impressive and improving sophistication, as the industry moves more toward a bifurcated view of mobile ads, and native advertising like content marketing get more attention," BMO Capital Markets analyst Daniel Salmon wrote in a note to clients.

Premium Subscriptions targets small and medium-sized businesses, professional organizations, individual members and business groups in larger enterprises. Subscriptions products include the Business/Business Plus/Executive suite of products, as well as the Sales Navigator product. The segment accounts for 20 percent of sales for LinkedIn.

"Management is taking a slow approach with Premium Subscriptions, however, long term we expect integration with multiple CRM platforms and see it as a valuable tool for sales people, a key user group for LinkedIn," Salmon said.

A strong focus on new product rollouts in 2012 helped LinkedIn create a more engaging platform for users and a more useful one for recruiters.

LinkedIn's investments started bearing fruit, with the company delivering a blow-out results for its fourth-quarter. Profit for the October to December period rose 67 percent to $11.5 million or 10 cents a share, share from $6.9 million or 6 cents a share last year. Adjusted earnings for the quarter almost tripled to 35 cents a share, way ahead of the 19 cent consensus estimate of analysts polled by Thomson Reuters.

LinkedIn's revenue for the fourth quarter jumped 81 percent to $303.6 million, which topped Street view of $279.5 million for the quarter. Linkedin ended the year with about 202 million members, up 39 percent from last year

Looking forward to the first quarter, LinkedIn sees revenues of $305 million to $310 million. For the full year 2013, the company expects revenue of $1.41 billion to $1.44 billion. Analysts currently anticipate revenues of $312.93 million for the quarter and $1.48 billion for 2013.

The company is set to clock profit growth of 94 percent in the first quarter and 49 percent this year. In the next five years, profits are expected to surge 60 percent a year, compared to industry's 20 percent, sector's 18 percent and S&P 500's 9 percent.

Investors were a little skeptical on the expensive valuation of the stock, which trades at 113 times its 2013 consensus earnings estimate. In comparison, the P/E figures for the industry, sector and S&P 500 amounts to 22, 19 and 15, respectively.

Shares of LinkedIn, which went public on May 19, 2011 at $83 versus its IPO price of $45, are currently trading at $150 levels and looks set to cross $175 before year-end. They were trading between $84.10 and $151.89. During the past 52-weeks and above its 50-day moving average of $117 and 200-day average of $109.28.

I believe that the future growth is fully reflected in the stock's high valuation. Since there are no near-term catalysts to boost shares (barring the next quarterly report in April), investors should wait for the right time as the price may correct after 22 percent rally on Friday. 

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