LinkedIn: A Link to the Cloud

02/24/2014 8:00 am EST

Focus: STOCKS

Rob DeFrancesco

Founder, Tech-Stock Prospector

 

A member of our Vulture Portfolio, this stock is a cloud-based enterprise software play specializing in human capital management, explains Rob DeFrancesco, editor of Tech-Stock Prospector.

In Q4, investors in LinkedIn (LNKD) focused on a sequential decline in unique visitors and page views, following a flattening of growth in the previous quarter for both metrics.

While these variables need to be monitored, I look at LinkedIn as more of a cloud-based enterprise, so this metric is of more interest: 2,443 corporate solutions customers were added in Q4, well above the average of 1,901 adds over the past eight quarters. LinkedIn's total corporate customer count now stands at 24,444, up 49% from a year ago.

Of LinkedIn's three main business segments (Talent Solutions, Marketing Solutions, and Premium Subscriptions), Talent Solutions—the unit involved in employee recruitment—accounts for the majority of revenue and is growing the fastest, notching Q4 revenue growth of 53%, above total revenue growth of 47%.

For 2014, LinkedIn's main goals include improving the Recruiter platform and continuing to build out the Sales Navigator solution aimed at sales professionals.

I see this segment as the most important piece of LinkedIn's business, not only because of its standalone growth potential, but because success in this segment can drive growth in Sponsored Updates and even paid subscriptions. Making the service more useful should naturally bring in more engaged users.

The just-announced $120-million acquisition of privately held Bright gives LinkedIn added technology when it comes to making posted jobs more relevant to potential candidates and suggested applicants more relevant to employers.

LinkedIn's 2014 revenue guidance of $2.02 billion to $2.05 billion looks conservative, and beatable, based on continued solid enterprise and international growth.

With multiple products now offered within Talent Solutions, LinkedIn can deepen existing relationships among its installed base, in addition to bringing on new accounts.

Applying a forward P/S ratio of 15 to a revenue estimate of $2.12 billion (growth of 38.4%) generates a fair-value price target of $266, revised downward from our previous target of $284 per share.

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