LinkedIn Q4 – The ecosystem issue.

The narrow focus of some ecosystem plays is starting to hurt.

• First there was Twitter, now there is Linked-in.
• Linked-in reported disappointing results as growth slowed more than expected causing investors to worry about the longer-term growth.
• Linked-in, like Twitter, has a valuation (12.4x 2014E EV/Sales), that is already pricing in high growth in the long-term.
• This means that when doubt creeps in, the shares crater.
• LinkedIn’s valuation is not nearly as high as Twitter’s (26x 2014E EV/Sales) and so it has not been punished nearly as hard.
• LinkedIn reported revenues / EPS of $447m / $0.39 compared to forecasts of $437m / $0.38.
• Guidance was weak with Q1 14E and full year 2014E revenues expected at $455m-$460m and $2.02bn–$2.05bn respectively.
• This compared badly to consensus at $470m for Q1 14E and $2.16bn for full year 2014E.
• LinkedIn now has 50% of all knowledge workers in the world on its site (277m) and the challenge now is to win the other half.
• A large number of these are in China where LinkedIn has only 4m members meaning that this is going to be a real focus for 2014.
• This will be quite difficult as Chinese sites are better at catering to local requirements and competition for LinkedIn here will be fierce.
• Historically, US internet companies have not fared well in China, which is such a massive market that it can sustain itself.
• Hence I suspect that the real answer for LinkedIn is not to grow the user base but to encourage the existing user base to use its site for more Digital Life services.
• This is exactly the issue that is hobbling Twitter and will eventually also cause Facebook to run out of growth.
• These companies cover only a part of the Digital Life pie and because they are focused on just that part, their addressable market is limited.
• RFM research indicates that the revenue opportunity from offering all Digital Life services is significantly greater than the sum of all the pieces.
• This is for two reasons:
  • First: The more of one’s services a user spends time with, the closer one’s relationship with the user and the more one knows about that user.
  • Hence, advertising can be better targeted and more relevant resulting in a much higher ASP.
  • Second: The more services that the user spends time on, the greater the opportunity the ecosystem provider has to target the user with advertising.
• Therefore, the whole is substantially greater than the sum of the parts.
• This is a big reason why Google outstrips everybody else by miles when it comes to revenues.
• It has all of Digital Life covered except for gaming.
• This is also the opportunity for Microsoft and Yahoo!.
• They have great coverage but they have to stitch it all together and make a great experience out of it.
• This is why Facebook’s first priority is not to get another billion users but to encourage the existing 1.2bn to do more than just social networking.
• This is what Twitter and LinkedIn must also do.
• Unfortunately for them, they are out of time. They must act now or their growth and their multiples will continue to contract.
• This is why I prefer Microsoft and Yahoo!. They have already solved this tricky problem. What they must do now is execute on what they have.