Facebook Inc (FB), LinkedIn Corp (LNKD): Three Things To Watch In This Upcoming Earnings Report

Whether companies like to admit it or not, many companies already have an Internet identity. For instance, when most people think of Facebook Inc (NASDAQ:FB), they think of connecting to people. When most think of Twitter, they think celebrities. If people think about Monster Worldwide, Inc. (NYSE:MWW) they think about job searches. When people think about LinkedIn Corp (NYSE:LNKD) they think about professional connections.

It’s Sort Of Like High School
It seems like just yesterday the Internet was this amazing creation that everyone was curious to explore. I remember using AOL, Inc. (NYSE:AOL) for the first time and getting online, I was amazed at how much information was available and how I could chat with my friends instantly. My, how times have changed. Today an Internet connection is almost an entitlement. Between the rise of smartphones, wireless modems, Wi-Fi, and other ways to get online, it seems like everyone is online. That’s great for companies that have established their identity; it’s not such good news for companies trying to become something new.

If the Internet were a high school, Google Inc (NASDAQ:GOOG) would be one of the cool kids. Google would either be invited to all of the parties, or throwing the party. Everyone knows Google, and this kid is known for being involved in everything. The kid at the high school that’s in all the clubs, talks to everyone and avoids cliques, that’s Google Inc (NASDAQ:GOOG).

Facebook Inc (FB)Facebook Inc (NASDAQ:FB), on the other hand, would be like the class president. Facebook generally gets along with everyone, but this class president has a big mouth so you have to be careful what you say. Many people pass messages to each other through the class president since he/she knows everyone. However, many times people edit what they would really say because they don’t want everyone to get the wrong impression.

Then we have LinkedIn Corp (NYSE:LNKD) and Monster Worldwide, Inc. (NYSE:MWW). Using the high school analogy, LinkedIn is the kid that has connections. This kid knows everyone, makes friends quickly, and is definitely going places in life. LinkedIn gets invited to all the parties, but people make sure to put on a good face with LinkedIn because he/she looks down on anyone who doesn’t. Monster Worldwide is the kid that thinks he/she knows a lot of people, but while LinkedIn has friends, Monster has a lot of acquaintances.

What About The Competition?
As you can see, certain web sites have a pretty clear identity. The reason this is key to understand is, when many people mention LinkedIn, they tend to throw in Facebook Inc (NASDAQ:FB) as a natural competitor. However, the established high school nature of the Internet makes this very unlikely.

The difference is Facebook is already established as a social network for talking to friends, posting pictures, and connecting on a personal level. LinkedIn Corp (NYSE:LNKD) is a professional web site and doesn’t care if you have friends on there or not. LinkedIn is about connecting workers to a network of other professionals, and to companies.

Monster Worldwide seems to have been left in the dust by LinkedIn. Monster seems to offer job searches and allows companies to offer jobs, but not much more. LinkedIn, in short, has built a better mousetrap.

Those 3 Numbers I Promised
Keeping all of the above in mind, at this point the only thing standing in LinkedIn’s way is the company itself. The first thing that investors need to watch for is a continued high level of research and development spending. In the last few quarters, the company spent around 25% or more on R&D. By comparison, Monster spent almost nothing on R&D, and Facebook Inc (NASDAQ:FB) spent 18.74% in the current quarter. In a competitive industry like professional development, LinkedIn Corp (NYSE:LNKD) can’t afford to slow down its R&D spend, or the company could be disrupted itself.

The second thing investors need to watch for is the company needs to get its sales and marketing expense under control. In the last four years, sales and marketing as a percentage of revenue has been growing sequentially. In fact, this line item has increased from 22.35% in 2009 to 33.41% in 2012. The company’s growth has been huge, but spending smarter on sales and marketing seems to be in order.

Third, investors need to watch the company’s cash flow and cash balances to determine success. Many people worry about LinkedIn Corp (NYSE:LNKD)’s use of stock options, but cash and cash flow tell a story of their own. In the last year, the company’s core operating cash flow (net income + depreciation) increased 84.43%. At the same time, the company’s net cash and investments grew by nearly 30%. As long as LinkedIn is growing these two measures at a good clip, investors have nothing to worry about.

It’s easy to worry about a stock with a current year projected P/E of 130. However, if LinkedIn can continue to grow its cash flow and cash balances like it has, analysts’ projections of over 60% EPS growth are believable. Relatively speaking neither Monster Worldwide nor Facebook Inc (NASDAQ:FB) can match this type of growth. As I said before, LinkedIn Corp (NYSE:LNKD) is the kid that knows everyone, makes friends quickly, and is really going places.

The article 3 Things To Watch In This Upcoming Earnings Report originally appeared on Fool.com and is written by Chad Henage.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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