Friday, 5 February 2016

A tale of two networks

Facebook and Linkedin (not Twitter) are the two largest social networks in the western world. Linkedin is more like your end of work Christmas party you're don't go there too much and it's not that much fun while Facebook is where users can relax and keep in touch with their friends. It's useful to keep these worlds separate. Both sites benefit from user generated content and the positive network effect of everyone being there. However the shares have dramatically diverged year to date.

Both must have
If you don't have a Linkedin profile recruiters worry while Facebook is how people communicate these days. Phones aren't used for calling anymore its used to scroll through Facebook's newsfeed! Mobile and engagement set Facebook apart 65% of users login everyday. Facebook's users click on the like button more than 6 billion times a day more than searches on google. With 70 likes Facebook can understand you better than your friends (helpful when advertising). We don't use Linkedin nearly as often but it has changed the human resources market. Recruiters can now search for candidates that are not actively searching for work. There are not many more important things than your job.

Linkedin a one day fall equal to Twitter's market value
A major difference that has changed is valuation. They make money two different ways. Being a subscription model (recruiters pay to access) Linkedin has always traded at a premium to Facebook the problem with advertising is that it can be moved easily (less predictable). A 40%+ one day fall erasing nearly $11 billion in value has Linkedin trading at a price earnings multiple discount to Facebook for the first time.

Price Earnings multiple

Linkedin's updated profit guidance caused the fall. We feel their guidance is conservative even more so than traditionally (past 4 quarters have  surprised by 20%, 72%, 83% and 1%). Guidance does not incorporate new product rollouts but removes $50M from discontinued products and does not include any benefit from the rollout of their new app launched in December.

Ni Hao Linkedin
We think Linkedin here makes sense (disclosure we bought a position Friday) as unlike other social networks it is allowed in China. This increases their addressable market and is a clue to how valuable their service is. The Chinese government is willing to have them operate as Linkedin helps workers find jobs. It's a connection to the world's companies, universities and professional talent. Their last China disclosure counted more than 13 million members up 3x since the launch of their Chinese language version in 2014. They are currently investing in China but it will eventually be a massive opportunity something the market is conveniently forgetting.

Decisive has a long position in Facebook (FB) and now Linkedin (LNKD). The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.