Efficient, easy to understand model
“LinkedIn is nothing like Facebook Inc (NASDAQ:FB).” This is the message that LinkedIn CEO, Jeff Weiner, wants investors to know. On paper, there may be many parallels. But the reality remains that these two companies have fundamentally different models.
While LinkedIn Corp (NYSE:LNKD) can make money when you are logged out of your account, Facebook Inc (NASDAQ:FB) can’t. That is why irate Facebook loyalists went ballistic when renowned media mogul Rupert Murdoch took a stab at Facebook saying it would go The MySpace way based on reduced hours spent per member on the site.
How does LinkedIn Corp (NYSE:LNKD) make money from your account when you are not logged in? LinkedIn uses information that you have provided to furnish its flagship Recruiter product, allowing people who buy talent for a living to conveniently access a rich pool of varying talents. Because of this, every hour spent engaging by a single user on LinkedIn allows the company to bring in $1.30. In the same regard, Facebook Inc (NASDAQ:FB) only manages to earn around $0.06.
The flagship Recruiter product is the juice; it is the core of LinkedIn Corp (NYSE:LNKD). Not only is the model behind Recruiter easy to understand, but the product is likely to grow astronomically; especially considering the hastened pace at which entrepreneurship and personal branding is growing. Already, Recruiter has disrupted the traditional recruitment industry. While LinkedIn’s stock has gained more than 60% this year, traditional heavyweight Heidrick & Struggles has slumped close to 70% in the past half decade.
Lesser reliance on ads coupled with competitive advantage
LinkedIn Corp (NYSE:LNKD)’s flagship Recruiter product brings in close to 60% of the company’s revenue. The remaining 40% is brought in by ads and subscription services. This spread out product portfolio not only minimizes risks but also limits LinkedIn’s exposure to the risky digital ad business.
The digital ad business has been under major reforms in the past several years, and companies that previously ruled, like Yahoo! Inc. (NASDAQ:YHOO), have been compelled to go back to the drawing board.
Content is no longer king, but rather software. Software companies like Facebook and Google are making more money while those that churn out content are experiencing shrinking ad revenue. In the most recent earnings, Yahoo! Inc. (NASDAQ:YHOO)’s display ad revenue tracked downward 12% on a 2% slip in unit ad sales and a further 11% decrease in the price of a single display ad.
Why is software eating the digital advertising business? Software is proving to be more reliable than content because through it, advertisers can buy ‘interested’ audiences rather than premium inventories. It is all about programmatic buying, or using software to make the process of buying and selling ads more efficient and result-oriented.
Software platforms can create a matrix from user information that allows them to sell ads that actually prompt users to click through. This trend is in fact one of the key propellants behind Facebook’s search graph, which will ultimately allow Facebook to profile users based on actual interests and not random ‘likes,’ ultimately allowing it to target more ‘personal’ ads. This is also the same trend that has pushed Yahoo! Inc. (NASDAQ:YHOO)’s Marissa Mayer into dozens of software acquisitions.
How does LinkedIn fit into all of this? LinkedIn mainly has primary user data, or data relating to users’ direct and important interests. This means that if it is able to create a matrix that organizes its data efficiently, it will be able to target ads that hit at the direct and primary interests of users. This will mean higher click-through-rates, more money and higher quality ads in the long run.
Conclusion
Going by the immense potential, LinkedIn Corp (NYSE:LNKD)’s stock is set to trade higher both in the near-term and long-term. And while there are no dividends as of yet, the company’s decision to plough back profits will certainly allow it to expand its footprint, offer better services and provide good returns for growth investors. It is a solid growth investment.
The article You Don’t Need a Thousand Reasons to Buy LinkedIn – Just Two originally appeared on Fool.com and is written by Lennox Yieke.
Lennox Yieke has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn. Lennox is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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