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LinkedIn Corp Coverage Initiated At ‘Overweight’: Morgan Stanley

While LinkedIn may be facing some serious competition from Twitter in terms of job listings, the company doesn’t show any signs of giving up its dominance as the business person’s social network. Morgan Stanley analysts predict that LinkedIn will continue to outperform expectations and have set their estimates ahead of the consensus.

LinkedIn Corp Coverage Initiated At 'Overweight': Morgan Stanley

LinkedIn’s earnings underappreciated

In a report dated Feb. 25, Morgan Stanley analyst Brian Nowak and his team initiated coverage on the social network with an Overweight rating and $310 per share price target. They think Wall Street doesn’t appreciate LinkedIn’s earnings power enough, and their analysis suggests that the “runway” for the company’s Talent Solutions business is “still very long.”

Their 2015 EBITDA estimate is 7% higher than the consensus estimate, while their 2016 estimate is 8% higher. They said in addition to these growth rates, the core business’ incremental margins of greater than 65% will keep pushing the social network’s profitability higher and higher despite investments in new products. Over the next four years, they think LinkedIn’s margins will expand by 740 basis points.

Opportunities for LinkedIn’s Talent Solutions

The Morgan Stanley team is especially bullish on LinkedIn’s Talent Solutions segment because they see opportunities for Linked In to upsell to about 5,400 large U.S. enterprises and capture another 5,400. They estimate that just 37% of the “large enterprises” in the U.S., which they put at around 6,200 companies, subscribe to Talent Solutions. They add that about 32% are self-serve paying subscribers, and the other 32% don’t pay anything to LinkedIn.

They estimate that LinkedIn could add at least $150 million in annual Talent Solutions revenue through upselling and adding more customers. The Morgan Stanley team also looked at which industries have a large proportion of companies that aren’t on LinkedIn. They put together the following bar graph to show which industries represent the biggest opportunity for LinkedIn to grow its Talent Solutions revenue.

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In terms of smaller businesses, the analysts say just 9% of them are paying LinkedIn. They estimate that there are about 40,000 small or medium businesses in the social network’s core Tech, Engineering and Healthcare sectors that aren’t on the platform at all.

If LinkedIn could convert only 5% of them into paying customers, that would equate to about 75% of their expected U.S. customer growth in the next couple of years.

As of this writing, shares of LinkedIn were up by 1.4% to $272.76 per share.