Social networking companies have been extremely volatile over the past couple of years. The high profile failure of Facebook Inc (NASDAQ:FB)’s IPO and Zynga Inc (NASDAQ:ZNGA)’s decline of epic proportions have implanted this negative perception around web companies. LinkedIn Corp (NYSE:LNKD), however, bucks the trend.
Stock performance and outlook
Facebook Inc (NASDAQ:FB) has been a tough ride. Over the past 14 months, LinkedIn has outperformed by rallying 81.18%, while Facebook declined by 36.70%. Zynga Inc (NASDAQ:ZNGA) did the worst of the three, declining by 59.71%.
Industry statistics are showing that global demand for social networking services is on the rise.
According to eMarketer, the number of social network users will grow to 1.73 billion in 2013. By the end of the year, one in four people will use a social networking site. People have a variety of social networking accounts, but the networks that are likely to dominate are Facebook Inc (NASDAQ:FB) and LinkedIn Corp (NYSE:LNKD). EMarketer also predicts that social network user bases will grow at double digits until 2015 across the world. By 2017, the same company estimates that there will be 2.55 billion social network users.
LinkedIn is a winner
LinkedIn Corp (NYSE:LNKD) has a lot of potential, and that’s no exaggeration. We are not talking value, and we don’t care about dividends. When an investor is buying the stock, the only thing that’s on that person’s mind is the rate of growth.
In its most recent quarter, the company grew its net income by 352% year-over-year. This growth in net income was accompanied by a 72% year-over-year growth in revenue. The growth in both revenue and net income clearly indicate that this stock is a real growth investment.
Analysts on a consensus basis believe that the company will grow its earnings by 64% in the current fiscal year. It is also expected to grow earnings by 43.8% in the following fiscal year. The company has reported significant year-over-year and quarter-over-quarter growth in membership, unique visitors, and page views. This is why the stock grew so significantly.
Going forward, I anticipate the company to grow its net income due to increasing demand, improving contribution margin (marginal profit per user), and international expansion. Analysts on a consensus basis project that the company will grow its earnings by 58.43% on average over the next five years.
Know what to look for in Facebook
This company can be an extremely difficult stock to recommend. On one hand, it thrives in a positive business environment (social network user base will grow in double digits). We cannot deny the strength of having one million users on the social network. Going forward, the company’s revenue growth should stay above a 20% rate.
What concerns most investors is the exponential increase in spending that has led to high-profile failures like Facebook Inc (NASDAQ:FB) Home and Facebook phone. LinkedIn comparatively has highly logical product extensions, such as memberships and job recruitment services. Over at Facebook it is still all about the ads.
The advertising-driven business model weakens when we consider that a Facebook Inc (NASDAQ:FB) mobile ad is displayed on a four inch screen. There is always the potential of advertising in user’s newsfeeds, but it depends on how much risk Facebook is willing to take. Overly monetizing the social network could do more harm than good.
The company will push a lot of products out of its research labs over the next five years. Many of them will fail financially, but some of them will stick around and turn into something that can be monetized.