Good Reasons to Link to This Stock

04/04/2012 8:30 am EST


Rob DeFrancesco

Founder, Tech-Stock Prospector

Given all the hype and then disappointments of recent social media IPOs, this stock remains attractive and the company remains a force in the space, writes Rob DeFrancesco of Tech Stock Prospector.

I continue to monitor LinkedIn (LNKD) because I like the fundamentals of this business.

The company is at the forefront of the social-networking trend, and is run by a very capable management team that knows how to innovate. LinkedIn represents the new way to connect in professional networking. However, the lofty valuation remains a concern.

Since I last checked in on the company in December, the stock advanced to just above $96 from around $70 before pulling back along with the overall market. I still think the valuation is stretched.

I did increase my fair-value price target a bit, to $85.20 from $83.85, to reflect an improved revenue outlook. The revised target is generated by applying a forward price-to-sales ratio of ten to the 2012 consensus revenue estimate of $872.2 million, which is up from $807.5 million in early December.

The new consensus represents expected growth of 67%, while the high estimate of $903.3 million indicates growth of 73%. Given that I would like to see a 25% return to the fair value, LinkedIn shares would be most attractive on a pullback to around $68.

Despite the valuation obstacle, several big investors initiated LinkedIn positions in the December quarter—including Jennison Associates, Winslow Capital, Silver Bridge Capital, and Alydar Partners. Jennison’s purchase of 3.63 million shares was large enough to place the firm among LinkedIn’s three largest investors, while Winslow Capital’s purchase of 2.2 million shares was good enough for fourth place.

Existing shareholder T. Rowe Price was the biggest fourth-quarter buyer, adding 5.85 million shares; the firm now owns 5.98 million shares. Wellington Management boosted its position by 420%, purchasing 1.64 million shares, and Fidelity increased its position by 180% with the purchase of 841,110 shares.

Coatue Management, which has 73% of its long equity assets of $3.2 billion in tech stocks, added 293,840 shares (a position boost of 77%) and now counts LinkedIn among its 15 largest holdings. After more than doubling its position in the December quarter, Contour Asset Management ($936 million in long equity assets/77% tech weighting) now has LinkedIn among its five largest holdings.

For the fourth quarter, LinkedIn reported per-share earnings of 12 cents, five cents above the consensus estimate, and revenue rose 105.3% to $167.7 million, against the consensus of $159.4 million. Member page views rose 77%, indicating increased engagements across the installed base of 145 million members (14 million members were added in Q4).

Students and recent grads are LinkedIn’s two fastest growing demographics. Fully 60% of LinkedIn members are now located outside the US.

Mobile page views jumped 350%, and accounted for 16% of total member page views in the December quarter. Management said it is seeing a marked increase in mobile engagements from tablets, particularly the iPad.

Revenue in the Hiring Solutions unit (50% of total revenue) grew 136% to $84.9 million. LinkedIn added 1,900 new corporate customers and now has a total of 9,200 enterprise customers, up from 3,900 at the end of 2010.

Marketing Solutions revenue rose 77%, to $49.5 million, and Premium Subscriptions revenue advanced 87% to $33.3 million. This marked the seventh straight quarter of accelerated revenue growth in the subscription business.

For Q1, the company sees revenue of $170 million to $175 million, vs. the consensus of $170.8 million. For 2012, the revenue guidance range of $840 million to $860 million came in above the consensus of $828.2 million.

At the Morgan Stanley tech conference last month, LinkedIn CEO Jeff Weiner said one key thing that the company does best is connect talent with opportunity. With LinkedIn, everyone is a potential candidate for a new job, project, or business venture. LinkedIn members are able to show their value in the global workforce, while recruiters and potential business partners can reach a wide audience of passive candidates.

Also, LinkedIn is smart to focus on the next generation of users: Get the college crowd hooked now and LinkedIn becomes the default networking tool.

The company’s Alumni feature allows college students and recent grads to reach out to alumni in a particular field for industry expertise, advice and potential career opportunities. It’s all about making the right connections. LinkedIn even provides interactive graphs showing where a school’s alumni ended up in terms of specific companies, locations, and job functions.

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