Why the Market Loves LinkedIn — and Hates Facebook

LinkedIn trumps Facebook on vision and karma—and investors don't mind that it's so much more expensive

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Jin Lee / Bloomberg via Getty Images

It’s not how the script was supposed to read. Facebook was the ‘it’ company, LinkedIn just the warm-up act. Yet LinkedIn is stealing center stage from Facebook, attracting all the glamour and love. How’d that happen?

LinkedIn has turned itself into the social media darling of 2012, stepping over the near-dead and wounded, all down substantially from their highs, including game maker Zynga (its stock price down 81%), coupon dealer Groupon (down 77%), radio service Pandora Media (down 37%), and local service-rater Angie’s List (down 33%). Oh, yes. And Facebook, down 45% from its IPO price and 54% from it’s fleeting high of $45.

Meanwhile, LinkedIn began the parade of social media companies back in  May 2011, debuting at $45 and then doubling in its first day of trading. The stock has been a roller coaster ride, careening down to the 60s and periodically busting through 100. It closed Tuesday at $106.70. LinkedIn looks a great deal pricier than Facebook — Herman Leung of Susquehanna Financial Group estimates that LinkedIn is trading at 102 times 2013 estimated earnings versus 60 for Facebook — and yet investors don’t seem to be worried.

(MORE: Do Facebook Ads Work?)

What’s LinkedIn got that Facebook hasn’t? Let’s break it down into four categories.

A Clear Vision.  You can think of LinkedIn as coming in the tradition of Julius Caesar: LinkedIn est divisum in tres partes, and all roads lead to revenues, even in a year when hiring is lackluster. Leung ticks them off: Premium subscriptions; hiring solutions ($121 million, up 107% in the second quarter); and advertising, which accounts for just 20% of revenue.

Facebook, meanwhile, makes most of its money from advertising, but that business is weakening as users move to mobile, which Facebook is just beginning to tap. The company is hoping to make lots of money from other businesses—someday. But no one is clear exactly when or how. Maybe finance? Maybe the app store? A phone? Gambling? In the Facebook conference call, the top brass sounded like smart people figuring things out on the fly. That work style—part of The Hacker Way—is a central tenet of the Facebook ethos, calling for constant change and improvement. But the Hacker Way doesn’t tell investors anything about grand vision. And working on the fly doesn’t feel appropriate to a $50 or $100 billion publicly traded company.

Investors also like that LinkedIn’s user base of 175 million members, though relatively small, is made up of professionals. Facebook may be the social media Goliath with its 1 billion Main Street members, but such users likely to prove more fickle than those who use LinkedIn for professional reasons.

(MORE: How LinkedIn Makes Money Off Your Resume)

Predictability. LinkedIn blew everyone away with the second quarter earnings report and predicted even better earnings and revenue for the rest of the year. Facebook didn’t offer any guidance on earnings and not a single analyst sitting on the call even bothered to ask. That left a lot of people wondering why. Martin Pyykonen, a senior research analyst at Wedge Partners, says companies like Facebook and Google never give guidance on revenues. “It would be certifiably insane if they gave an outlook.” Why? Because a business that depends on advertising is by nature unpredictable, even to insiders. Facebook and Google just don’t have a reliable way of predicting pricing or how many users will click on ads.

A Lack of Bad Karma. The people’s IPO turned out to be the ultimate insiders’ deal. Facebook, the company that in theory can’t provide guidance, reportedly told Wall Street analysts involved in the deal to lower their expectations for first quarter revenues. Big investors got wind of that shift but retail sure did not. That pretty much squelched any inclination to give the Facebook team any benefit of the doubt. The PR has gotten so bad that today Yahoo Finance ran a story on its homepage that ran in Business Insider last week, which itself was an old story about all the insiders who sold at the IPO—publicly available information for many months now. If editors think you can get pageviews from running old news that makes your company look bad, it’s time to do something radical. The other story making the rounds: The big winners in Facebook are investors who bet against the stock—with profits as big as 500%. With publicity like that, who cares if the vast majority of Wall Street analysts still rate the stock a buy. As my grandmother might say — buy, shmuy.

(MORE: Google and Microsoft Follow Apple into Hardware Market)

Mobile. Mobile has been the Achilles heel for Facebook, once the invincible social monster that ate all the competitors (MySpace, Friendster). But that was in the days of desktop. Facebook is just figuring out how to make money on smartphones and tablets. And LinkedIn? Mobile is a blessing that deepens its relationship with users, says Susquehanna’s Leung. In the world of recruiting, greater access is a plus. And for LinkedIn that adds up to more dollars, and not from advertising. Which is why so many people love it.

That — and the fact that it’s not Facebook.

25 comments
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Little Dog
Little Dog

One thing to consider: Facebook as a history of abusing its members through unwanted interface changes and privacy missteps.  I feel like the product, and not the customer, when I use Facebook.  I, for one, will not put any significant information on Facebook because I don't trust them.

LinkedIn may not have done done anything to earn my trust, but they also haven't done anything to abuse it.

qyna
qyna

It seems that most of the sites mentioned in this article are grossly overvalued. Facebook is worth more than Boeing? Really? And how many people either have fake FB accounts that are used simply for commenting on websites (I'm raising my hand), or accounts that they never look at anymore? I think that FB is a fad that has run its course. And its recent acquisitions scream "desperation". Gambling, FB? No, really, GAMBLING?? 

And the others? How many times can you play Farmville and still find it enjoyable? Angie's list? Ever heard of Yelp, Google Places, or any of the other numerous websites and apps that provide the same information for free? Groupon.......I might find 1 out of 100 of their coupons useful. 

These sites have business models that were built on projections that never quite lived up to the hype, and people are now beginning to realize this. The fact that their stock prices are dropping shouldn't be all that surprising. 

Stop
Stop

Thanks for reminding me I have an account I made years ago, I need to delete it because I get emails from them almost daily...that I disregard.

People are free to lose as much money as they deserve. It's funny people bought into the fb ipo. But, hey that's America.

Raj Mehta
Raj Mehta

$LNKD has a very small base of paying customers. Lot of folks added their profiles long ago and never deleted. Just do the math -$20/month per paying customer - it works out to less than 4% per my calculations of total users listed on LNKD

Reythia
Reythia

True.

And yet, when one of those non-paying customers who usually ignores LinkedIn loses her job, the first thing she does after downing her sorrows in a beer is dust off the resume and update LinkedIn.  Because it's another pathway to a potential future job.

ProwdLiberal
ProwdLiberal

I personally think all these social networking stocks are immensely over valued. The value they deliver to the consumer is TRIVIAL and still their valuations are astronomical. Facebook was supposed to be worth $100 billion? LOL!

The value that Facebook delivers "writing on the wall" is as trivial as the company that sells chewing gum. I know that everyone talks about the reach of advertising because of its 900+ million users. So is the reach of chewing gum companies. They sell to billions. Also I have never seen a study that can directly correlate the advertising reach and its  translation into product purchases. I myself never buy a product because I saw it on either TV or Facebook.  Both Facebook and LinkedIn are just not worth their value.

qyna
qyna

Now if someone can only find a way to put advertising on packs of chewing gum.......

sas58
sas58

couldnt have put it better

Susan Shin
Susan Shin

Linked-in works much better than Facebook.

dialyn
dialyn

I signed off LinkedIn. I was getting increasing tired of all the marketing shoved at me and the last straw was a demanding email from them that said: "Join these three groups now."  Not "consider these groups to be of interest to you" (they were not) but "join." Over time, I've noticed LinkedIn has gotten more demanding and insistent. If I wanted that I would have joined Facebook (which I am not a member of). So I signed off and, guess what, I'm still getting marketing from them.  Want to kill warm fuzzy feelings? Shove yourself into my life when I've already told you I've no interest in being marketed to. Will this help? I've got no money.  I've got no job. There's no money to be made off my skeleton. No point marketing to me.

Nancy Miller
Nancy Miller

Hi there -- I contacted LinkedIn to ask why you are getting unwanted messages from them. Follow this link and you should be able to get rid of the pesky email: 

 http://help.linkedin.com/app/a...

dialyn
dialyn

 Thank you for your help.  It looks as if that worked. I understanding having marketing shoved at us at every turn is just the way of the world now, but I get so tired of being chased around the Internet and in my email box by offers I don't want, will never respond to, and can't afford anyway.  It was disappointing when LinkedIn got more aggressive with this advertising when it didn't seem that way at the beginning (an illusion or maybe I'm just more sensitive to it now).   The whole marketing shove  wears me down, but not in a way that would influence me to buy anything  I appreciate you taking the time to respond. 

Nancy Miller
Nancy Miller

I'm glad that worked. By law, you should be able to remove yourself from any unwanted corporate email lists. Sometimes the senders make it hard to find the unsubscribe button, but there is almost always a way to remove yourself from a list. 

LoudRambler
LoudRambler

 The sentence with LinkedIn est divisum in tres partes does not make much sense, in my opinion.

 I mean, even though I had to look up this quote online (I'm not that familiar with Latin or Julius Caesar's quotes), the author should at least elaborate why LinkedIn is divided into three parts.

AnonWho
AnonWho

"Leung ticks them off: Premium subscriptions; hiring solutions ($121 million, up 107% in the second quarter); and advertising."

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