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.

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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.

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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.

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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.