Why LinkedIn Needs More Cash
How will LinkedIn spend the cash it plans on raising in its secondary stock offering?
Since LinkedIn (NYSE: LNKD) went public in 2009, the company has been able to grow revenues 709%. It has expanded turnover from $120 million to $972 million in its latest fiscal year. Business has been quite good for LinkedIn, but in order to continue growth it needs more money to expand. Recently it was announced that the company is planning to raise $1 billion in a new offering of its stock, amounting to over 4 million in new shares. The question is: What exactly will LinkedIn do with an additional $1 billion?
Growing its presence
LinkedIn has 238 million members across 200 countries, much smaller than that of other social networks. Facebook (NASDAQ: FB), for example reported at the end 2012 it had 1.06 billion members using its site monthly. And although Twitter doesn’t publicly break out total account numbers, The Telegraph has reported that it possesses at least 500 million members.
Because of LinkedIn’s low member total, it needs to boost spending that attracts new users. In 2012 the company’s overall costs went up 84% to $915 million, its biggest expense being sales and marketing which went up 97% year-over-year to $324 million. With an influx of cash, expect LinkedIn to increase its marketing toward career-minded professionals.
Planning for acquisitions
After sales and marketing LinkedIn’s largest spending is product development, which went from $132 million in 2011 to $257 million in 2012, a 94% increase. LinkedIn could use some of the cash it raises to purchase businesses that could add new features, improving its overall product. One way to do this is by adding companies that can help boost user engagement that will in turn increase activity on its site. That was the plan when LinkedIn bought SlideShare, a content sharing platform that it spent $119 million in cash and stock to bring into the fold.
SlideShare is LinkedIn’s largest purchase to date, and since the company’s founding, it has only acquired 8 companies. Facebook, in comparison, has purchased 37 companies since its founding and 9 of them since its initial public offering in May of 2012. Facebook’s IPO raised $16 billion in cash, allowing it the freedom to make big purchases. An example of this was the Instagram deal it did for $300 million in cash and $700 million in stock to expand its presence in photo sharing, one of the site’s biggest attractions. Facebook has $9 billion of cash on hand which is enormous compared to LinkedIn’s $270 million in cash and cash equivalents.
Direct competition
LinkedIn doesn’t only compete with social media sites such as Facebook. Coined as a “business networking company”, LinkedIn also challenges job search sites like Monster Worldwide (NYSE: MWW). While Monster.com claims it is the largest job search engine in the world, traffic numbers are slipping. The competing job search site Indeed.com actually has higher U.S. traffic rankings than Monster , proof that it is losing ground to competitors.
Monster faces diminishing potential as revenues continue to drop and its registered members migrate to other sites like LinkedIn. When Monster made $124 million on $1.3 billion in revenue back in 2008 that was a good financial year. But by comparison, in 2012 Monster lost $258 million on $890 million in revenue. Falling revenue indicates there is a problem, and the small number of registered users only makes it worse. Monster has been around since 1999 but only has 200 million total users , which is 38 million less than that of LinkedIn. And Monster’s 2012 $188 million marketing and promotion budget was 42% less than that of LinkedIn’s, limiting its ability to attract new member sign-ups.
In a good spot
LinkedIn operates in a unique business, blending a job search engine with a social network. There is no other company on the market that mimics this concept, which is a display of excellent strategy. Though it faces competition, LinkedIn doesn’t have another business that is directly challenging it in terms of business execution. And with an injection of cash, it can spend more marketing to job seekers and acquiring companies to enhance its existing business.
This new stock offering and subsequent increase in available cash will strengthen LinkedIn’s position in the market. With that in mind, look for LinkedIn to focus on marketing itself as a destination for professionals not only to find jobs, but also as a career resource to keep users coming back even when they are not looking for a new employer. In the end, LinkedIn’s value will continue to increase if it builds itself up as a complete career destination, and not just a site for job networking.
