LinkedIn Inc (LNKD) - Buy

31-March-2015

Overview: LinkedIn is different from social networking sites such as Facebook and Twitter
due to its focus on the professional aspect of a members identity. LinkedIn also differs from
Monster and other job portals because it promotes engagement among its members to build
connections. By combining two separate markets (social networking and job portals),
LinkedIn built a huge user-base who may never leave.

Economic Moat:

LinkedIn is a narrow-differentiator and by having a singular focus, it is effectively and

efficiently able to deliver value to professionals.
LinkedIn sits alone at the top of the market for professional social networking. No other
large company in this market space really offers any substitutes.
LinkedIn takes advantage of two-sided network effects. It means that members benefit
if there are more members in the network and members also benefit if there are more
companies posting job openings. At Facebook, members benefit only through other
members (one-sided network effects).
It is a winner-take-all situation where members build a lot of connections and cannot
carry those connections to any new networking website. This aspect of LinkedIns
business makes it very sticky and increases the switching costs.

Largest revenue segment is Talent Solutions: Professional organizations (60% of

Key numbers:
Current price : $249.86
Market Cap : $31,895M
EV
: $29,539M
EV/EBITDAFY15 : 36.22
P/EF15
: 83.98
Target price : $283
% upside
: 13.2%
Recruiting Industry
Competition

High

Capital intensity

Low

Concentration

Low

Market share
LinkedIn has a market share of
5.1% in the 13.3B recruiting
industry.

revenue) want data of potential job candidates and unlike other recruiters, LinkedIn provides
them with the worlds largest, continually updated source of talent.

Market size of Talent Solutions and LinkedIns share: The recruiting business is
very fragmented with no one company having a competitive edge over other (be the best),
but LinkedIn is going down a path to capture more of this business as it continues to develop
richer data tools to help people find jobs, and jobs find people (be unique). In US alone, the
total revenue of recruiting business is $13.3 billion and LinkedIn has only 5.1% market share.

Overall Member Growth: The number of members reached 347 million at an average
growth rate of 40% over the past four years. LinkedIn's value is the ability for people to
maintain a separate professional identity. While Facebook users are sharing photos of kids
and parties, they can project their carefully crafted personal brand at LinkedIn

EPS estimates:

Corporate Customers: All segments of revenue have grown over the past four years,

Fiscal Street Model

2014A (0.13) (0.13)
2015E (0.19) (0.47)
2016E 0.88
0.95

with highest average growth rate (94.5%) in the Talent solutions segment. In FY14, revenue
per corporate customer increased by 41% and the number of customers increased by 260%
reaching 33,271 compared to FY11.

Steady Operating Cash flow: LinkedIns cash flow from operations has increased from
133M in FY11 to 569M in FY14, an increase of more than 300%.

Continuity over Time: LinkedIn is the most used social media website by Fortune 500
companies for recruiting and I believe that this segment has the greatest upside. LinkedIn
has focused on product development (24% of revenues is R&D) and the creation of a
massive user base rather than recording high profit margins. Hence, I expect LinkedIn to
increase its market share over the next five years before monetizing services further.

Coms Comparison:

LinkedIn

Market
Cap
31,895M

Revenue
Growth
45%

Facebook

232,863M

Twitter
Monster

Company/Metric

EBITDA estimates:
Fiscal Street Model
592
2014A 592
814
2015E 815
2016E 1,139 1,043
ROIC
2014A: (8.1)%
2015E: (11.6)%
2016E: 11.7%

P/EFY15

P/CashflowFY15

EV/EBITDAFY15

Valuations:

83.98

66.34

36.22

2016: EV/EBITDA

58%

42.62

38.75

21.35

38,882M

111%

131.66

106.36

51.72

577M

(5)%

16.79

11.46

6.48

*All estimates are taken from Thomson One (Reuters)

34x

33x

32x

$291

$283

$275