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Earnings Review: Can Linkedin Corporation (LNKD) Grow Margins?

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LinkedIn Inc.Linkedin Corporation (NYSE:LNKD) adds a great innovative twist to existing social media platforms, i.e. a professional networking kind. And it is performing very well too, LinkedIn now boasts of more than 200 million members on its website. The stock price of the company has done very well compared to the broader market; however, the company’s earnings haven’t improved much in spite of such strong progress.

Strong Growth All Around

The company’s cumulative users have ballooned to 200 million in early 2013 from 145 million at the end of 2011. The company is also getting a lot of user eyeballs as well, comScore ranks LinkedIn as the 23rd most visited site worldwide. Even more impressive is the growth in revenues. LinkedIn’s revenues in Q3 2012 were up a staggering 81% year-over-year. All business segments reported strong numbers as well. As more and more companies shy away from job boards like Monster and CareerBuilder, and put more job postings on LinkedIn’s portal.

LinkedIn’s sales force, which comprises of a big field sales group, did a great job signing up new corporate clients to use LinkedIn’s business services. Corporate customers increased 87% year-over-year and ended Q3 2012 with close to 14,000 accounts. And going forward, more corporate clients will come in, as employers move away from traditional website-only portals like Monster and aggregation sites like Indeed.com.

Notable Challenges

In spite of all these stellar achievements, LinkedIn has a few issues investors should take heed of. The company’s revenues are highly dependent upon its Talent solutions business, which brings in almost 55% of net revenues. The company’s advertising revenues from the marketing solutions business hasn’t taken off. And the revenues from Premium subscriptions have been growing too, but the addressable market of that segment is rather small.

LinkedIn’s bottom line hasn’t been posting solid numbers either. In the last three years and the first nine months of 2012, the company’s net profit margins has ranged from -3.4% to 1.5%. As a result, the growing social media company trades at a sky high P/E of more than 800.

LinkedIn’s user engagement has gone down-hill as well, which is a negative sign. The number of Page Views excluding mobile, are down sequentially from having 9.3 billion views in Q2 to 8.9 billion views in Q3. Just like many other firms, mobile is increasingly becoming a key front for LinkedIn. At the end of Q3, roughly 25% of all unique visitors came in from mobile-based devices. Going forward into 2013, this number will almost certainly notch up. However, the LinkedIn’s monetization from mobile is minimal, the company started rolling out recruitment postings and expects to post display advertisements on mobile soon.

Competition in Social Media and Advertising

Competition for recruitment dollars stems from mostly traditional websites such as Monster, CareerBuilder etc. However, Monster’s partnership with Facebook Inc (NASDAQ:FB) in the build-out of the social jobs app might get momentum in the future. And also, Facebook’s Graph search tool will be a force to reckon with for LinkedIn. Facebook has hinted that usage of friends and family for recruitment and networking purposes might be a meaningful tool for its 1 billion users.

Also, LinkedIn’s online advertising business faces substantial competition from hundreds of firms and the most notable being the usual suspects of the Internet-era i.e. Facebook, Google Inc (NASDAQ:GOOG), Yahoo! Inc. (NASDAQ:YHOO) etc. Many of these firms have an established user base that frequent their respective sites almost daily and advertisers follow accordingly. Also, the likes of Google Inc (NASDAQ:GOOG) and Facebook offer very high end user targeting capabilities which are very difficult to match for competing Internet portals.

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