LinkedIn Has A Powerful Business Model
LinkedIn, the online professional network company has an interesting business model in Insight's view. The company's network effect based business model is innovative. The LinkedIn member network becomes ever more resistant to competitive threat as it grows (a la Facebook, Microsoft), and the company has a first mover advantage as well. LinkedIn has a dual stream of revenues from advertising as well as from those seeking employees. It is intriguing that LinkedIn at the same time disintermediates recruiters and also is a must have tool for recruiters
The company has an ingenious way of inducing members to make public private information which serves to greatly expand their network as well. When I first signed up to become a member, I was asked to grant access to my e-mail contact list so those people could be added to my network of LinkedIn contacts. While you might not want all the people in your contact list to be made available to every LinkedIn contact you have, if you agree once, this process makes it automatic, and increases the size of the LinkedIn network in an exponential-like way. This making public of personal information is also a Facebook modus operandi, in Insight's view.
LinkedIn has many ways of making the network valuable to the user by enabling users to not only keep up with job openings and make themselves available to recruiters, but to keep up with alumni, join groups with similar interests, etc. Another example: Say you are a salesperson, and want leads for cold calling. The LinkedIn network provides you with an entrée that you wouldn’t have otherwise ( Hello I am xx a friend of a friend of a friend, etc.).
Insight often uses a pro forma approach to valuation, which Insight has found especially useful in analyzing technology companies with seemingly high price/earnings ratios. Herein research and development expense is amortized rather than fully expensed, additional income from an increase in deferred revenue is added to stated net income, and cash spent on capital expenditures to grow the business is added back to net income, so as to subtract only maintenance capital expenditures from the addback to net income of depreciation. In LinkedIn's case pro forma net income is greatly increased thereby, and there is thus a bullish valuation argument for a substantially higher stock price, in Insight’s view.
In the short run the stock price could be vulnerable if unemployment began to rise again since employment growth is a driver of LinkedIn's valuation. Then again, many stocks would be vulnerable if unemployment grows. The major point though is that LinkedIn's network effect business model is impressive—as LinkedIn’s network gets bigger LinkedIn becomes ever more resistant to competitive threat. LinkedIn's business model provides it wth significant competitive advantages over the long term, in Insight's view.
Philip I. Frank, Ph.D.
President and Portfolio Manager
Insight Asset Management LLC
e-mail: insight-asset@earthlink.net
Insight Asset Management LLC is currently long LinkedIn common stock (LNKD) in its model portfolio and in its client portfolios.
The company has an ingenious way of inducing members to make public private information which serves to greatly expand their network as well. When I first signed up to become a member, I was asked to grant access to my e-mail contact list so those people could be added to my network of LinkedIn contacts. While you might not want all the people in your contact list to be made available to every LinkedIn contact you have, if you agree once, this process makes it automatic, and increases the size of the LinkedIn network in an exponential-like way. This making public of personal information is also a Facebook modus operandi, in Insight's view.
LinkedIn has many ways of making the network valuable to the user by enabling users to not only keep up with job openings and make themselves available to recruiters, but to keep up with alumni, join groups with similar interests, etc. Another example: Say you are a salesperson, and want leads for cold calling. The LinkedIn network provides you with an entrée that you wouldn’t have otherwise ( Hello I am xx a friend of a friend of a friend, etc.).
Insight often uses a pro forma approach to valuation, which Insight has found especially useful in analyzing technology companies with seemingly high price/earnings ratios. Herein research and development expense is amortized rather than fully expensed, additional income from an increase in deferred revenue is added to stated net income, and cash spent on capital expenditures to grow the business is added back to net income, so as to subtract only maintenance capital expenditures from the addback to net income of depreciation. In LinkedIn's case pro forma net income is greatly increased thereby, and there is thus a bullish valuation argument for a substantially higher stock price, in Insight’s view.
In the short run the stock price could be vulnerable if unemployment began to rise again since employment growth is a driver of LinkedIn's valuation. Then again, many stocks would be vulnerable if unemployment grows. The major point though is that LinkedIn's network effect business model is impressive—as LinkedIn’s network gets bigger LinkedIn becomes ever more resistant to competitive threat. LinkedIn's business model provides it wth significant competitive advantages over the long term, in Insight's view.
Philip I. Frank, Ph.D.
President and Portfolio Manager
Insight Asset Management LLC
e-mail: insight-asset@earthlink.net
Insight Asset Management LLC is currently long LinkedIn common stock (LNKD) in its model portfolio and in its client portfolios.
posted by Insight Asset Management LLC at 9:33 AM
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