LinkedIn CEO Jeff Weiner just spoke at our Ignition: Future of Digital conference.He described the 5-10 year vision for LinkedIn, which is vastly more ambitious than most people realise.
LinkedIn currently has more than 187 million members and is adding them at a rate of 2 per second.
Weiner’s goal is to ultimately become the professional identity for the 3.3 billion professionals worldwide, and have a profile for every company on the planet. This “economic graph,” Weiner believes, will ultimately allow LinkedIn to facilitate the flow of human capital to areas of opportunity. And, in the process, it will help companies hire, market, and sell their products.
If LinkedIn were to get only halfway to its goal, it would still increase its member base by nearly 10X over the current size.
LinkedIn’s user base is already 63% international.
LinkedIn’s revenue, meanwhile, is currently about 2/3rds US-based and 1/3rd international.
Weiner’s goal is to grow LinkedIn’s international revenue until it is commensurate with its international user base. Doing so would obviously drive humongous growth in international revenue over the next few years.
Everyone knows that LinkedIn is growing fast. But what most casual observers note when they look at LinkedIn is the company’s modest profits relative to its revenue.
LinkedIn is currently generating run-rate (annualized) revenue of about $1 billion.
LinkedIn’s run-rate operating profit, meanwhile, is only $24 million.
That’s an operating profit margin of only 2%.
This paltry profit margin causes casual observers to scoff that LinkedIn’s stock is obviously absurdly overvalued. After all, the stock has a trailing price-earnings ratio of 690x!
But here’s what casual observers are missing.
LinkedIn’s profit margin is going to explode.
Right now, LinkedIn is investing heavily in sales and marketing and research and development, with the aim of extending its services around the world.
All this investment, which is currently increasing as fast as LinkedIn’s revenue, is depressing the company’s profitability.
But that isn’t going to last forever.
At some point, LinkedIn will have built out a global engineering team and a global sales and marketing team.
At that point, LinkedIn’s spending on R&D and Sales and Marketing will decline sharply as a per cent of revenue.
When that happens, LinkedIn’s profit margin will leap higher.
How much higher?
Barring some unforeseen massive new expense line, LinkedIn’s operating profit margin should leap from 2% today to at least 30% in the future–if not much higher.
How do we know that?
Because LinkedIn’s cost structure is similar to the cost structures of Facebook and Google, both of which are much more mature companies and much more profitable.
Like Facebook and Google, LinkedIn has a very high “gross margin,” meaning that it doesn’t spend much to create and provide the content and its services that its users consume.
- Facebook has a 75% gross margin
- Google has a 65% gross margin
These high gross margins allow Facebook and Google to spend a massive amount on engineering and sales and marketing and still have operating profit margins in excess of 30%.
The same should be true for LinkedIn.
And it turns out that LinkedIn has an even higher gross profit margin than Facebook and Google.
- LinkedIn’s gross margin is a staggering 85%
With a gross margin like that, LinkedIn can spend a boatload on tech and marketing and still generate a huge profit margin.
In fact, given LinkedIn’s gross margin, its operating profit margin could be even higher than Facebook’s and Google’s.
LinkedIn’s operating profit margin, it seems reasonable to assume, might eventually hit 40% or 50%.
CEO Jeff Weiner didn’t comment specifically on LinkedIn’s future profit margin at the conference this morning. He did say, however, that the company’s early profitability is surpassing its own expectations.
The bottom line is that LinkedIn’s current low level of profitability creates a misleading impression of the company.
In a couple of years, LinkedIn’s business model should mature.
And when it does, LinkedIn’s profit will likely explode.