LinkedIn Corporation (LNKD)’s Expanding Moat

Entrenchment at its best
With membership, page views, and unique visitors up 67%, 39%, and 29%, respectively, moat momentum appears to be in LinkedIn’s favor. To no one’s surprise, advertisers have flocked to the social network, with LinkedIn’s advertisers more than doubling from Q4 2011 to Q4 2012.

In contrast, Monster Worldwide, Inc. (NYSE:MWW) is a classic example of what happens to social networks when their network effect begins to erode. As LinkedIn’s network grows stronger, Monster’s value proposition becomes less attractive. In the company’s fourth quarter, bookings, revenue, operating income, and EPS all saw year-over-year declines in the double digits. At just 8.3 times earnings, Wall Street’s sentiment is a reflection of the poor expectations investors have for Monster’s future.

Though Monster management is quick to say “year-over-year decline in total bookings … is primarily attributable to continued weakness in Europe, which has been negatively affected by global economic challenges,” LinkedIn’s powerful network plays a role in the decline as well; with a fast-growing user base, LinkedIn offers advertisers and employers an increasingly compelling value proposition.

Never short castles
There is no doubt that LinkedIn is an outstanding business. Despite its positive moat trend, however, I’m still not willing to make an outperform CAPScall on the company — there is simply too much perfection priced into the stock. But that doesn’t mean I would short the stock, either. In fact, I would never short any company with a solid moat. But long-term investors should keep an eye on LinkedIn in 2013 for an opportunity to re-examine buying opportunities on any significant sell-offs.

The article LinkedIn’s Expanding Moat originally appeared on Fool.com and is written by Daniel Sparks.

Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends Facebook and LinkedIn. The Motley Fool owns shares of Facebook and LinkedIn.

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