Facebook Inc (FB) & LinkedIn Corp (LNKD) Don’t Need Google Inc (GOOG), Right?

Page 1 of 2

LinkedIn Corp (NYSE:LNKD) reported a fairly strong quarter in terms of revenue and earnings. The outlook the company’s management team gave was a bit of a let-down, but then again, the company may be lowering expectations in an attempt to surprise shareholders with an out-sized earnings beat.

LinkedIn Corp (NYSE:LNKD)

Earnings highlight

The company’s recent earnings announcement was for the most part a tremendous success. The company reported $22.6 million in net income in the first quarter of 2013, compared to the $5 million in net income the company was able to report in the first quarter of 2012. The company’s overall growth in net income was partly driven by the 36% year-over-year membership growth. Net-revenue for the period grew by 72% year-over-year.

The company provided revenue guidance at $1.43 to $1.46 billion. The company also anticipates adjusted earnings before interest, tax, depreciation, and amortization at around $330 million to $345 million. The company’s guidance fell short of the analyst consensus of around $1.5 billion.

The guidance may have fallen short of analyst estimates. But, on the other hand, LinkedIn Corp (NYSE:LNKD) has been able to beat analyst earnings estimates by 57.35% on average over the past four quarters. The company’s attempt to lower full-year guidance below analyst estimates could be management’s attempt at low-balling estimates. This is being done in an attempt to surprise shareholders in future earnings releases.

LinkedIn thesis

Some of you (including myself) are skeptical of the potential market opportunity of employment solutions. However, I found the answer to this skepticism within Microeconomic theory. According to Wikipedia:

A 1970 paper by the economist George Akerlof discusses information asymmetry, which occurs when the seller knows more about a product than the buyer. A lemon is an American slang term for a car that is found to be defective only after it has been bought.

Now the answer may not seem as obvious to you, so allow me to elaborate. What often happens in corporate America is that a resume doesn’t display nearly enough information about an employee, or a prospective hire. It only gives a small snippet of information. The information provided isn’t very indicative at identifying whether the employee will contribute to the overall profitability of the firm. In fact, the person selling their labor services will often write a resume that overly exaggerates his or her potential. Microeconomics further elaborates on this, and points to the market inefficiencies that are caused by lemons, which leads to dead-weight loss.

LinkedIn Corp (NYSE:LNKD) offers a partial solution. It gives employers the ability to scope out a large database of potential hires. Each hire is given a profile page that gives them the opportunity to sell themselves to a prospective employer. The benefit provided to employers, is that employers can quickly compare one profile to another.

Page 1 of 2