LinkedIn’s Real Value: Knowing All About People in All the Right Places

May 5, 2013, 5:20 p.m. ET

LinkedIn’s Real Value: Knowing All About People in All the Right Places

By ROLFE WINKLER

Dear LinkedIn LNKD -12.93% : Please put up a few more disappointing quarters so investors who have missed the boat can pile in.

Smart types long ago realized the professional social network is more than just an improved online job board.

LinkedIn Corp.’s main product, driving 57% of first-quarter sales, is enterprise software. It charges recruiters about $8,500 annually for premium tools to find, contact and track a wide pool of desirable job candidates. Alternatively, a headhunter may charge a quarter of a new hire’s first-year salary. Fill one slot and LinkedIn pays for itself. That should help the company to steadily raise prices, especially as more members sign up and it adds new features like “endorsements” where skills listed on a profile are verified by contacts. A more modest price increase went into effect this quarter. But LinkedIn raised prices to $8,200 from $7,000 in the first quarter of 2011. Since then, the number of corporate customers has risen nearly fivefold to more than 18,000.

One reason clients didn’t seem to mind the higher price is the expanding pool of potential hires: Over the same period, the number of LinkedIn users has leapt to nearly 220 million from 90 million.Large sales teams are another obvious market for LinkedIn’s data. First off, its members also represent a rich pool of potential customers for a number of industries. And the valuable profile information might make it easier to close sales. Imagine if, before making a call, a salesperson knew a colleague went to high school with a lead and could provide an introduction.

This is a market LinkedIn is just starting to tap into with a $50-a-month product called Sales Navigator. Already, premium subscriptions generated $66 million, or 20%, of first-quarter revenue. Evercore analyst Ken Sena estimates Navigator could generate $600 million of annual revenue on its own within five years.

But with huge potential comes a huge valuation. LinkedIn’s stock dropped 13% Friday after it reported good first-quarter results but provided projections for the rest of the year that came in lower than expected. Even so, its market value, net of cash, is more than $19 billion—a heady 13 times estimated 2013 revenue. And as it invests for growth, LinkedIn’s earnings are minimal.

Thursday’s weak guidance was mostly due to LinkedIn’s third leg: advertising. Responsible for 23% of first-quarter sales, the advertising business is shifting for LinkedIn.

It plans to follow the lead of Facebook FB -2.27% and Twitter by putting sponsored content directly in the news feeds of users. There could be a hiccup in revenue growth as it transitions away from traditional banner ads, for instance. Yet this puts LinkedIn in a better position to capitalize on the great shift from desktop to mobile usership since banner ads don’t work on small smartphone screens anyway.

LinkedIn’s challenge is to get users to spend more time on its site so it can sell more advertising. One draw may be handy user tools. Recently, it launched a mobile app that collects in one place users’ contacts strewn across various platforms such asMicrosoft MSFT +1.00% Outlook, smartphone address books and Twitter. While a site like Facebook has much more usage, LinkedIn has more valuable data on its users, which they also update frequently.

Therein lies LinkedIn’s true value. It isn’t a social network so much as a treasure trove of personal data. It should profit from the truism that success isn’t about what you know, it’s about who you know.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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