1. 1
LinkedIn Corp
NYSE: LNKD
February 5, 2016
Alexey Isaev, CFA
isaev.alexey@yahoo.com
+44 203 287 6000
LinkedIn Corp
Lollapalooza from social media
Figure 1. LinkedIn (NYSE: LNKD) stock price chart
Source: Morningstar
Investment thesis
1. LinkedIn is a natural monopoly with widening economic moats and a potential
to increase revenues eightfold; the stock could grow almost five times
2. It is the only network with a sound business model rooted in the real-economy
needs servicing – recruitment, sales and education
3. LinkedIn’s business model is highly scalable, and it has already gained a
critical mass to sustain its disruptive growth
4. A recent acquisition of an educational platform, Lynda.com, can dramatically
enhance the current users’ experience and bring another significant revenue
stream
Recommendation: Buy
Current price: $ 116.78
Target price: $ 675 (+480%)
Shares out: 131m
Market Cap: $ 15.6b
Industry:
Internet information
providers
Business:
Social network for
professionals

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Business description
LinkedIn is the largest professional network on the Internet. Its membership base
equals 400m globally, with more than 100m being active users. LinkedIn’s main
products are Talent Solutions, Marketing Solutions and Premium Subscriptions. All
the products are sold either online through the self-serve channel to enterprises and
individual members or offline by field sales force, which works primarily with
enterprise customers.
Figure 1. LinkedIn metrics
Source: LinkedIn
The Company's solutions include free services and monetized solutions. Its free
services allow members to manage professional identity, engage with professional
networks and access knowledge, insights and opportunities.
Monetized solutions are available for both enterprises and individual members.
Individual members can get access to additional functionality, including additional
parameters to access the network, improved visibility of the profile, as well as job
posting space and access to the candidate database with multiple-criteria parameters
of search for recruiting professionals. Enterprise customers can benefit from access to
candidate database management system, postings, brand promotion services,
corporate webpage and other career-related options. Another stream of monetized

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solutions comes from sales-related activities, which include business advertising and
database with search options for companies looking to grow business network, find
new contacts, etc.
Business segments
The main reportable business segments are Talent Solutions (64% of the total
revenue, or 2,008m annualized), Marketing Solutions (18% of the revenue, or 560m
per annum) and Premium Subscriptions (18% of the revenue, or 552m per annum).
Figure 2. LinkedIn segment revenue
Source: Statista.com
Talent Solutions segment includes Hiring Solutions, and Learning & Development
Solutions (Lynda.com). Hiring Solutions are provided for enterprises and professional
organizations to identify and acquire talent. The solutions sold to the clients include
access to the talent database, tools for searching candidates on the basis of a number
of parameter, talent search data management system, advertisements of the jobs,
career-related content postings, company brand promotion pages and content, etc.
Learning and development Solutions, i.e. Lynda.com, is a recent addition to the
business of LinkedIn aimed at providing a comprehensive platform for professional
development and continuous studies through access to the database of online
educational materials.

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Marketing Solutions aim at enterprises and individuals seeking to advertise through
the LinkedIn platform taking into account such attributes as industry, function,
seniority, and company size, etc.
Premium Subscriptions are provided for small and medium sized enterprises and
professional organizations as well as individual members and business groups in
larger enterprises to benefit from the advanced functionality of the LinkedIn platform,
including increased visibility, additional in-mails and premium search services.
The difference
LinkedIn is different from other social networking sites in that its primary purpose is
professional networking, and its business model is around professional development
and is built to derive substantial revenues from career-related services rather than
through general advertising. And LinkedIn has been successful in its ambitious plans,
having grown by far the most effective social media for recruitment purposes, and the
only one with an overall positive effectiveness feedback as surveyed by Adecco, one
of the world’s largest HR solutions provider.
Figure 3. Professional network
efficiency ranking
LinkedIn
Facebook
Twitter
Blog
Viadeo
YouTube
Xing
Tumblr
Pinterest
Instagram
Source: Addecco
LinkedIn competes with online professional networks, including Facebook and
Twitter, online recruiting companies and job boards, such as Viadeo, Xing,
Moster.com and Indeed.com, online and offline outlets that generate revenue from
advertisers and marketers, as well as online and offline, companies for customers with
lead generation and customer intelligence and insights. Whereas LinkedIn may lack
resources of larger players, it also avoids direct competition, and due to its focus on
professional services benefit from its niche orientation.
Among the most prominent and close in their business model competitors are French
Viadeo with c. 65m members including 17m in China through its sibsidiary

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Tianji.com and Xing with 14m memebers in German speaking countries. These two
platforms used to grow fast, however, none has been able to sustain the impetus of
LinkedIn even at their local markets with Viadeo already behind LinkedIn in France
and Xing losing its share to LinkedIn in Germany as presented in charts below. In the
globalizing world local competive advantages are tested by global rivals, and
LinkedIn has gained the critical mass to continue its growth beyond English-speaking
space.
Figure 4. Professional networks in France
Source: Google Trends

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Figure 5. Professional networks in Germany
Source: Google Trends
Lynda.com
Lynda.com was acquired by LinkedIn in April 2015 for 1.5B US dollars. The market
reaction was tepid. Meanwhile the potential of the educational platform is enourmous
and coupled with the membership base and resources of LinkedIn the company can
take a significant part of the market in just a few years. Both lynda.com and LinkedIn
are used by small and large organizations, and the clients of LinkedIn can get an easy
access to the educational platform for their employees. The post-acquisition LinkedIn
provides a full cycle for talent search, acquisition and development, and through the
acquisition LinkedIn solidified its position in the professional space.
Since the merger in April, Lynda.com has improved its Alexa traffic rank whereas its
main competitor Coursera.org slid down. Given Lynda.com’s scalable model and the
potential to grow client-base and leverage on the membership base of LinkedIn,
Lynda.com can become a powerful source of additional income.

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Figure 6. Alexa trafic rank for Lynda.com
Source: Alexa.com
Figure 7. Alexa traffic rank for Coursera.org
Source: Alexa.com

8. 8
Valuation
LinkedIn target price is based on P/E multiple applied for a mature LinkedIn’s
earnings estimated for 2019. The company is still in an early stage of monetization;
therefore, use of current metrics is not relevant. Another complication for choice of
appropriate metrics stems from the diversity of companies within the social
networking space, with many lacking positive earnings and some EBITDA as is often
the case for fast growing companies in an early stage.
Company Country
Market
Cap
P/E P/S
Debt/
Equity
P/B
Users
m
EV/
Users
EV/
Sales
EV/
EBITDA
LinkedIn USA 15.60B - 5.6 0.3 3.6 400 48.75 7.1 81.9
Facebook USA 314.47B 111.9 19.9 -0.3 7.4 1490 209.72 19.8 45.6
Twitter USA 11.55B - 6.2 0.4 2.9 316 42.34 6.6 -
TripAdvisor USA 9.20B 39.6 6.2 0.2 7.4 60 153.0 6.3 20.5
HomeAway USA 3.49B 606.5 7.2 0.3 3.6 NA NA 7.9 55.7
Xing Germany 1.07B 88.2 8.4 -1.5 17.2 17 62.65 8.4 26.9
Viadeo France 28M - 0.9 0.6 0.9 65 0.74 1.6 -
51job China 1.98B 29.3 6.6 0.3 3.2 80 26.88 1.1 4.0
Average
(ex-LinkedIn)
175.1 7.9 0.0 6.2 83.4 7.4 30.5
LinkedIn derives its revenue streams (USD 3,120m annualized) from the three
primary segments: Talent Solutions (64% of revenue, 2,008m), Marketing Solutions
(18%, 560m), and Premium Subscriptions (18%, 552m).
1. Within Talent Solutions segment, Hiring Solutions account for almost 60%,
or 1,844m annually, and consists of Corporate Solutions (enterprises and small and
medium businesses) and Job Postings. Corporate Solutions bring two-thirds, or
1,230m, of the Hiring Solutions revenues, and Job Postings Solutions – the rest of
the Talent Solutions revenue, or 615M annualized.
a. Enterprises Solutions account for two-thirds of the Corporate Hiring Solutions
revenues, or 820m. With an average annual ticket of 13,000 US dollars, the total
number of current enterprises using the services of LinkedIn equals c. 63,000, or
less than 10% of the overall number of large enterprises. In the medium term the
proportion of enterprises, using the services should at least double, whilst the

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penetration rate within the company (i.e. the intensity of the active use of
LinkedIn services by a company’s personnel) should grow from the current
estimate of c. 10% to 30%. In nominal terms (i.e. after consideration of inflation
of c. 2% and growth in the number of enterprises of c.1%), the revenue stream
will grow more than six-fold and reach 5,600m within three- to five-year’s
horizon.
b. Small and Medium Businesses Solutions account for one-third of the Hiring
Solutions revenues, or 410m. Given the annual spend of 3,300 US dollars, the
number of current small and medium businesses using the services of LinkedIn is
to c. 124,000, or 2% of the overall number of small and medium businesses
globally. In the medium term the proportion of enterprises, using the services
could triple to reach 6% rate, whilst the penetration rate within the company
should double from the current 20% to 40%. As a result the revenues will grow
just over six times to reach 2,800m.
c. Job Postings currently bring as much as 615m. With an average price of a posting
of 500 US dollars, and the average number of posts per user of one a year, the
number of posters among smaller companies is 1,230m, or 1%. In the medium
term the rate could grow as much as five times with the number of postings by a
company growing from one to two posts a year. In total, job postings revenue will
grow ten times, reaching 6,900M.
In total, the revenue stream from Hiring Solutions will grow to 15,300m US dollars.
2. Learning and Development Solutions are comprised of the Lynda.com
services, which include corporate and individual subscribers. Currently Lynda.com
brings 165m, however, this is the newly created business and its potential is very
high.
a. With an average annual subscription of 360 US dollars and the targeted audience
of 11m, (11m is a current number of Coursera’s subscribers) – still less than 1%
of the expected membership – individual subscribers will bring as much as
4,300m.
b. Corporate subscribers are expected to present c. 10% of the total corporate
members of LinkedIn. Given an average annual subscription price of 1,000 US

10. 10
dollars and a target for total number of corporate members equal 52,000 (10% of
LinkedIn corporate clients), additional revenue of 560m is expected.
Overall, Lynda.com should ad c. 4,850m to the top line, and total Talent Solutions
(including Hiring Segment) revenue will be equal to c. 20,200m on an annual basis.
3. Marketing (Sales) Solutions, accounting for 560m US dollars of the revenue,
consist of two customer bases: Enterprise Clients and Small and Medium Businesses.
a. Enterprise Clients account for 336m of revenues, or 60% of Marketing Solutions
revenue. Enterprise client base will grow by the factor of two, and the number of
LinkedIn active users within the company will triple, the Marketing Solutions
revenue stream from enterprises will grow more than six-fold in nominal terms to
reach 2,300m.
b. Small and Medium Businesses account for the remainder of 220m, or 40%. With
a number of small and medium businesses customers growing three times, the
revenue will grow just over three times, to 760m.
Overall revenues from Marketing Solutions will reach c. 3,000m.
4. Premium Subscriptions account for 18%, or 550m, of annual revenues. With
an average subscription price of 280 US dollars per year, the number of users is c. 2m.
Historically, the number of subscriptions grew proportionately to the number of
members, and roughly equaled 0.5% With an expected membership base reaching
860m in the midterm, growing at a decelerating rate, the subscription revenue stream
will increase in line with the membership base (historically premium subscribers
accounted for c. 0.5% of the total member base, and the number remained relatively
stable) growing to 1,300m US dollars.
Total revenues from all the businesses of LinkedIn will reach 24,600M. As the
company grows the membership base, it will also be able to capitalize on the pricing
power; however, this is not accounted for in revenue streams calculation.

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Margin
For margin estimation, the following assumptions, reflecting the industry standards as
well as LinkedIn’s historical averages adjusted for the changes in size, have been
made
Costs of goods sold 10%
Product development 15%
General and administrative 10%
Sales and marketing 30%
EBITDA margin 35%
Depreciation and amortisation 10%
PBT margin 25%
Tax rate 35%
Net profit margin 16%
With EBIT margin of 25% and an effective tax rate of 35%, net margin equals c. 16%
resulting in a net income of 3.990m per year in a midterm. Note, that sales and
marketing expenses are expected to remain high even as the company matures due to
its high labor intensive approach for selling products to the customer base,
particularly to enterprises, whereas Depreciation and Amortization will grow from the
current level to reflect increased capital expenditures, which are expected to be equal
in the mid to long term. Stock-based compensation, totaling 10% of the revenue, is
accounted for in the appropriate expense lines.
Given that the company will still have potential for considerable growth and that it
can gain additional benefit from change in pricing (as the company grows, the value
for clients and members of the network from the access will grow, and the company
will be able enjoy pricing power), P/E=20 (ex-cash) is an appropriate multiple for
company valuation; therefore, the market capitalization should reach 89b (after
consideration of a cash projected to be equal c. US 10b), or 675 US dollars per share.

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Conclusion
LinkedIn is a rare opportunity to buy a great business with wide moats at a relatively
early stage. As the company continues to grow, its moats become deeper and the
value of the network for clients and members will grow faster than the membership
base, which still sees double-digit growth. With a target price of 675 US dollars per
share and an implied upside of 480% from the current level of 116 US dollars, or
more than 50% a year over the mid-term period of four years, LinkedIn is a great
business and a wonderful investment for a patient investor.

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Select assumptions and output
Macro environment assumptions: population and businesses growth, CPI, LinkedIn users
Source: IMF, United Nations, LinkedIn, author’s estimates

14. 14
Revenue streams projections
Source: author’s estimates

15. 15
Expense items projections
Source: author’s estimates
Valuation metrics: P/E and P/TBV output
Source: author’s estimates