Originally published on LinkedIn May 19, 2015
“LinkedIn is strutting itself beautifully, with the tiara on its head and no corporate beauty queens to battle.”
Given the perpetuous nature of public companies, the title of this analysis and strategy article is plausible, and definitely not far-fetched. Nonetheless, it was carefully chosen to explain why and how LinkedIn is positioned to be a 100 Year plus corporation. All things being well in LinkedIn’s favor, it is definitely achievable with the firm’s current operational strategy and growth trajectory. On April 9, LinkedIn announced its acquisition of Lynda.com for $1.5 billion. That announcement fed the media, pundits, Wall Street and other interested parties something to talk about. On April 30, during its Q1 earnings conference call, LinkedIn lowered its 2015 yearly guidance which caused the stock to crash after trading hours. Consequently, it plummeted almost 21 percent losing $8 billion. If a company founded in 2003 has just lost or drops $8 billion in value, why would anyone choose to write anything remotely close to a centennial discussion, 88 years ahead of time? If you are able to read the entire article, it will make sense, I hope. LinkedIn’s business is doing well, with revenue up 35 percent from the previous quarter to $638 million in Q1 of 2015. Unfortunately stocks usually trade on sentiment not reality. That’s why the stock is down, because LinkedIn lowered 2015 guidance it provided to analysts. Overall, LinkedIn shares are up 42 percent over the past year.
Why is LinkedIn a 100 Year Company?
Economies and their GDP grow because people work and produce. Humans have been working since the dawn of time, and will continue for eternity.
“Consequently, any platform that controls the pipes of global connectivity in the knowledge economy is a winner by leaps and bounds. Globally, professionals work an average of 35 to 45 years, and LinkedIn has provided the tools to manage online personas efficiently. That means once you join in your early 20s you do not leave until retirement.”
Please note, LinkedIn’s century long potential has less to do with technological prowess, but more to do with the nature of its unique business advantage. As universities around the world certify more graduates, they will keep joining and staying on for decades (their career span, 35 to 45 years). There’s little or no maintenance required, until one begins to search for new opportunities, or decides to update new skills. Another critical factor is the seamless integration of different silos e.g., recruiting, global business network and the skills enhancement platform (Lynda.com). Besides Wall Street stressing public firms about their quarterly earnings, there are no major external factors or pressures. LinkedIn is not a pharmaceutical company, or a consumer electronics manufacturer like Apple, which has to worry about a blockbuster product every year, or thereabout. Users, subscribers and companies paying for the service are satisfied. The business has a lot of great things in its favor, some by design, others are simply the nature of the business.
LinkedIn is still in its first inning and there are no formidable competitors in the U.S., or globally. Hence there’s no stopping its dominance and growing market share. It would be extremely difficult for another professional network to amass 350 million users under one roof, after all, it took LinkedIn twelve years.
It’s almost inevitable to surmise that LinkedIn’s 350 million users will double and triple over the ensuing years. As of today, there are 3 billion people online and growing. According to this McKinsey report, the number of people in the global workforce by 2030; fifteen years from now, will be approximately 3.5 billion. Conservatively, let’s assume fifty percent are on LinkedIn by then, around 1.7 billion, plus college students; it gives an idea of its market size in the future. Given its size and no competitors, LinkedIn was already on the path to 100 years, the purchase of Lynda.com accelerates and solidifies it more.
Upon achieving mega scale and dominance, inherently, some businesses given their product, produce or service have an advantage to become 100 Year plus companies. Corporations such as East India Company, formerly known as East India Tea was founded in 1600, Banks e.g., Chase 216-years old, Coca Cola 129-years, crude oil explorers, railroad track and aircraft manufacturers such as Boeing etc. These are companies that make the world run, and we can’t do without their products, produce or services. Actually, we could all do without sugared water, but that’s another post. Coca Cola made the list because it’s a giant public company that’s over 100 years. More important, longevity is almost guaranteed based upon running a company well. Additionally, anticipating and adapting to changes before disruption or disintermediation knock on the door, prolongs corporate life span.
Control and ownership of two scalable businesses LinkedIn and Lynda which are still growing and the biggest in their respective industries; coupled with the fact that hundreds of millions, and later billions wouldn’t be able to resist their services, are some of the chief reasons for the 100 Year assertion.
Over the past year, LinkedIn has more than doubled its Chinese user base. The number of Chinese users on LinkedIn is currently at 9 million. There are over 615 million internet users in China. If half of them work in the knowledge economy, and LinkedIn is able to capitalize on that market, that’s already close to LinkedIn’s current 347 million plus user base. As the numbers reveal, there’s a lot of growth ahead. LinkedIn in China is important to mention because of the size, more important, because several internet companies (not direct competitors of LinkedIn) are blocked, or operate minimally in China. Google pulled out, Facebook is blocked etc. LinkedIn is predominantly for professional use and lacks the privacy issues that inhibit other tech companies. It’s basically free from the concerns that affect blockage and restrictions.
According to Global Industry Analysts Inc., the e-learning global market is estimated at $107 billion this year. Lynda.com is arguably the largest and its contribution is about 6,300 courses and 267,000 videos on its platform. LinkedIn has just bought into this new and growing industry. Owning a valuable asset in a huge industry is nothing short of business vision, and execution of long-term strategy.
“LinkedIn is strutting itself beautifully, with the tiara on its head and no corporate beauty queens to battle.”
Obviously no company or stock is immune from the powerful gyrations of the stock market. However, “LinkedIn is in the sweetest spot any company would wish to be, because it has no formidable competitor.” A search of LinkedIn’s competitors on CrunchBase will reveal twenty four companies, all of which if combined do not come close or even seem like direct competitors. Please do not mention Facebook as a competitor, it’s not, they are two different businesses. Even Boeing has Airbus, Coca Cola has Pepsi and Shell Oil has BP to worry about. However, LinkedIn is strutting itself beautifully, as it should, with the tiara on its head and no beauty queens to battle.
LinkedIn is in other people’s business, but others are not in LinkedIn’s core business.
- Articles published by Influencers equates to eyeballs coming to LinkedIn = less time spent on Financial Times, Bloomberg, USA Today and other big media entities.
- Job Board: competing against CareerBuilder, Monster, Dice, ZipRecruiter, The Ladders and more.
- E-Learning or skill enhancement: the purchase of Lynda = competition for Tree House, Khan Academy and others.
- Audience Network in 2015: LinkedIn’s foray into Ad Tech or targeted Programmatic Ad; that’s money which could have gone to Google, AOL or others in that space.
Leadership, Value Proposition and Going Concern are Solid
“As far as LinkedIn is concerned, don’t expect a MySpace deposing Hi Five era, or Facebook annihilating MySpace story, it’s not going to happen.”
In order to live another 88 years to surpass 100, it will need great leadership as it has enjoyed since day one. Since its inception, LinkedIn has been managed with an efficiency that can only be described as, or likened to a Patek Philippe Swiss watch. Unlike traditional Social Networks that depose one another when something shinier or sexier comes along, it will be hard to topple LinkedIn because professionals use it for professional reasons. Young adults and teenagers are usually into the latest fad e.g., Meerkat, YikYak and tons more, then they get bored and graduate to the next one. As far as LinkedIn is concerned; don’t expect a MySpace deposing Hi Five or Facebook annihilating MySpace story, it’s not going to happen. LinkedIn is deeply entrenched into our psyche (professionals) and its brand equity commands respect globally.
- People use it to apply for jobs, and global brands use it to post opportunities or for Social SEO etc.
- It’s one of the world’s largest publishing platforms. Students, smart people and wealthy ones, use it to publish FREE content with no expectation of payment.
- World leaders use it and influential people write tons of thought provoking articles.
- No Competition: In 2009 CareerBuilder launched BrightFuse, a site people referred to as a LinkedIn clone, well it doesn’t exist anymore.
- LinkedIn stickiness is high because people spend hours on the platform daily e.g., recruiters, job seekers and administrators etc.
- The acquisition of Lynda.com was a great strategy to acquire a large student user base.
- Lynda’s course completion certification is something that LinkedIn can market to recruiters
- Over the ensuing months and years, LinkedIn will market Lynda’s services to its 350 million users, obviously without any overlap.
- The effort of shifting to a comparable competitor is too high and cumbersome. More important, what kind of innovation could be done that would warrant a mass exodus.
- It will be difficult to convince people to maintain two or three professional networks.
Strategically, acquiring Lynda fits well into LinkedIn’s value proposition and enhances, if not solidifies longevity prospects. Ongoing job automation and the unstable labor market translate to employees having little or no choice but to improve their skills in the knowledge economy. Guess who gets paid when Lynda is used, LinkedIn. If you’ve ever used Lynda, it’s clear that it has done well in aggregating disparate disciplines onto one platform where people come to learn, in order to embetter themselves. From a monetization perspective, users pay either $25 or $37.50 monthly, and can learn all they want until their brainbox explodes.
Did LinkedIn Overpay for Lynda?
It’s all relative, depending on who you ask and the empirical calculations done to substantiate their response. If viewed from a long term perspective, I think it’s a bargain, even though it seems like a lot today. For the purpose of this article, we’ll keep it simple. A quick back of the envelope analysis should help validate the assertion. All being constant, which it appears to be, if Lynda.com retains operational sovereignty and branding, then its 2014, $150 million revenue will aggregate to $1.5 billion in 10 years. That goes on LinkedIn’s consolidated income statement [$150 million x 10]. Every dime made after the first 10 years and forever, is perpetual revenue devoid of the $1.5 billion cost. That’s “immeasurable value,” because the asset never stops generating revenue, coupled with extra capacity to scale.
In the real world, it’s not that straight forward because Lynda’s revenue will continue to grow yearly from $150 million upwards, especially now that its parent company can promote the service widely.
1. Total acquisition cost $1.5 billion; of that amount, 52 percent was cash, 48 percent was stock. That means the actual check amount, so to speak issued from LinkedIn’s corporate account was $780 million, and $720 million were shares. For the purpose of simplicity, it means in 5 years, Lynda’s 2014, $150 million revenue would aggregate to $750 million in revenue which goes into LinkedIn’s pocket. That’s $30 million less total cash paid, however LinkedIn will own the asset forever.
2. Although LinkedIn made $2.21 billion in 2014, part of that, or future earnings could still come from unsold shares. They only offered 7.48 million shares during the 2011 IPO a small quantity. Meaning it has a lot of resource at its disposal.
3. An isolated view or assessment of 2014 revenue, $2.21 billion against $1.5 billion acquisition cost in 2015, a ratio of 68 percent, would be an incorrect approach.
Two scenarios of how LinkedIn will profit from the purchase
Option 1: treated as two separate entities (which they currently are) and extracting or exploiting value for revenue
Option 2: treated as one integrated entity. “Synergy,” the sum of the whole is greater than its parts.
Option 1 is the simpler version, it’s the one we based our 10 year payback on, given Lynda’s 2014, $150 million revenue.
If we use Option 2; the assumptions will be different, and the analysis will have a larger effect on LinkedIn’s top line or revenue, basically much more money. However, that takes time to do e.g., re-branding and a higher subscription structure which could combine some of LinkedIn’s existing offerings which it already charges for. It’s also the riskier of both options; perhaps the reason LinkedIn opted for option 1, for now. Who knows what may happen in the future.
P.S. I am not saying other companies cannot come out tomorrow and create something great to rival LinkedIn, it’s just going to be tough to break through. However, anything is possible.
LinkedIn Looses $8 billion in Value = Good time to buy
The 21% devaluation presents an opportunistic buy for a richly priced stock. It’s an excellent time to buy. Exercise the fundamental rule of “buy low and sell high,” or “buy and hold strategy.” For existing owners prior to May 1, if long term you seek invested “Capital Appreciation or Wealth Accumulation,” stay with LinkedIn. “Wealth Accumulation” is carefully chosen over “Wealth Preservation” because of the simple fact, a devaluation which wipes away $8 billion value cannot equate to Wealth Preservation in any way, shape or form. However, don’t forget your previous gains. Since going public, LinkedIn has done well for investors. In the long run, like the Microsoft example; $5,000 invested in Microsoft (MSFT) stock on March 13, 1986 is now worth $2,608,034.64. Understandably for Day Traders, Hedge Fund or Pension Fund Managers who have blockholdings that make up material percentage of their portfolio, that’s damaging short-term. However as an individual with a Scottrade account, or if you have exposure to LinkedIn through Mutual funds or your 401k, you need not fret, it will bounce back.
Albeit in this video at 3:23, Mark Cuban says “diversification is for idiots.” I will leave that battle to him and Jim Cramer of Mad Money (are you diversified), or other heavyweights who want to enter the ring for an investment strategy wrestling match. P.S. Mark Cuban is really smart.
Stocks fluctuate or crash for several reasons, I like to lump them into two categories; exogenous or endogenous factors. In LinkedIn’s case as mentioned above, they did well, but the stock was plagued by negative sentiment as a result of the guidance, primarily an exogenous factor.
In order to simplify the calculation logic which supports the assertion that LinkedIn didn’t overpay, it’s clearer with a company which had no revenue at time of purchase e.g., Whats App. You may read $15 million revenue in the first half 2014 and net loss of $232.5 million, to simplify this post, that’s basically no revenue. On the surface it seemed expensive at $19 billion for Facebook, and it definitely was. Again, it’s relative 1. Depending on who’s buying, and how much money they have? 2. The future value to the acquirer 3. What are the implications or ramifications if Facebook didn’t acquire the asset? It would have posed significant threat to future operations. As of April 2015, Whats APP said it had 800 million users; normally the calculation will be done by attributing projected revenue to a percentage of 800 million users. Given the exceptional value of the App and its continued growth, I started extrapolating from the year 2017, a point by which it’s safe to assume they would have surpassed 1 billion users given their historical growth trajectory. 2017 is also a good time to assume they will have a large enough paying user base; given the 800 million users will be subject to the renewal fee after their first free year. Although several months later in October2014, Facebook completed the sale for $22 billion; we’ll use the initial $19 billion announcement. At the end of the day, it paid $4.59 billion in cash still much less than $19 billion.
- 1 billion users paying $1.00 beginning Jan 2017 = $1 billion revenue by end of the year 2017
- By 2018 the likelihood is that FB will raise annual fee to $2 or $3 (we’ll use $2 to be ultra conservative)
- Increased yearly fee by 2018: 1 billion people x $2.00 = $2 billion revenue, that’s good for a base price
- How many years will it take Facebook to make its money back? $19 billion divided by $2 billion = 9.5 years By 2026, Facebook would have got its $19 billion back in App renewal fee
- By 2027, (from 2017-2027) Whats App would have made $20 billion (don’t forget, we’re adding the $1 billion from 2017 before the fee was raised to $2 per year to renew the service)
An increase of $1 equates to $1 billion extra in revenue annually. In order to shorten the years, all Facebook needs to do is charge more. [$3 yearly fee = 6.33 years to make back 19 billion, 19 /$3] and [$4 yearly fee = 4.75 years to make back $19 billion simply 19/4]. The question Facebook would have asked itself 5 years later is why didn’t we do it? Since they did, there’s no regret. However, the huge Telcos are pissed off, and asking how did we miss that? They’ve been disintermediated by Whats App, which allows free text chat and recently free phone calls to anyone anywhere in the world, as long as they have Whats App.