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

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.

LinkedIn Corp (NYSE:LNKD)’s premium service has been able to grow its revenue by 73% year-over-year. The premium service allows a member to private message someone out of their extended network. The implications for this are enormous as it gives an average person the ability to contact the head of HR at Boston Consulting Group, Goldman Sachs Group, Inc. (NYSE:GS), and perhaps even Google Inc (NASDAQ:GOOG).

Project proposals and ideas by a consultant can be sent to the right person in an internal organization. After all, organizations are mired in bureaucracy, and getting the right information to the right person can be paramount to landing a multi-thousand dollar consulting opportunity.

LinkedIn’s competitive environment

Facebook Inc (NASDAQ:FB) totally ignores the employment solutions, or premium membership distribution method. In fact, Facebook’s sole focus is on revenue generation through advertising. Facebook Inc (NASDAQ:FB) isn’t a direct competitor to LinkedIn Corp (NYSE:LNKD) despite both being social networks. Facebook Inc (NASDAQ:FB)’s primary market is the average consumer who wants to connect with close friends and family.

The two social networks are in direct conflict with each other, but in a good way. No one would want to show their Facebook Inc (NASDAQ:FB) profile to the HR guy. Likewise, no one on LinkedIn is updating their news feeds with information pertaining to kids, families, and holiday-driven events.

Google+ falls far behind LinkedIn and Facebook Inc (NASDAQ:FB) in terms of growth. Google Inc (NASDAQ:GOOG) relies on its inter-connected network of Google Inc (NASDAQ:GOOG) services based on either a YouTube account or a Gmail account in order to inflate its Google+ user statistics. Not to mention, Google+ doesn’t have enough users, which limits economies of scale. I can find a vast majority of my friends on Facebook Inc (NASDAQ:FB), whereas with Google+ I can only find a limited number of them.

According to business insider, Google Inc (NASDAQ:GOOG) has been able to increase its user figures by 33% from the end of June 2012. Google+ has 135 million active users when compared to Facebook’s 1.11 billion monthly active users figure and LinkedIn’s 218.3 million user figures. Facebook is far ahead, with LinkedIn Corp (NYSE:LNKD) well ahead even though LinkedIn is extremely differentiated from both Google+ and Facebook.


Social networks are good at one thing but bad at the other. Google+ is the weakest social network. It falls behind on both social interaction and practicality. It isn’t aimed at a practical purpose, and it isn’t differentiated enough like Twitter to dominate its own niche. Investors in Google Inc (NASDAQ:GOOG) should not rely on Google+ for incremental revenue growth, despite the hype surrounding it.

The article Facebook and LinkedIn Can Both Co-Exist Without Google+ originally appeared on Fool.com is written by Alexander Cho.

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