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As Facebook falls flat, LinkedIn adds friends

In the world of social networking, LinkedIn is the dorky website for nerds that pales in comparison to cool, popular Facebook. Its lack of pop-culture cachet has even been immortalized on 30 Rock, when plugged-in super-executive Jack Donaghy (Alec Baldwin) quipped: "He's on LinkedIn … he might as well be dead!"

But that's not how the stock market sees it.

As Facebook Inc.'s maligned new stock listing slumped below $29 (U.S.) a share on the Nasdaq Stock Market for the first time Tuesday – down 24 per cent from its May 18 initial public offering price of $38 – its market-performance comparisons with LinkedIn Corp., its business-professionals-focused networking competitor, keep getting more dramatic. It was just a year ago that LinkedIn's IPO proved a huge hit among investors, generating big interest in a new class of social-media Internet stocks and propelling the rising company's stock into the stratosphere.

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LinkedIn is a fast-growing company with a proven paid-subscriber-driven revenue model, whose stock doubled on its first day of trading and is up 55 per cent for the year to date. Facebook is a market disappointment with unanswered questions about its growth model, whose stock went nowhere in its market debut and has fallen 30 per cent from its early-first-day peak.

"Based on the way it is trading, there's a much better [investor]mindset in holding LinkedIn [shares]than Facebook," said Scott Sweet, head of IPO Boutique, a Florida-based IPO-focused investment advisory firm.

And that's even after this year's price gains in LinkedIn, which have pushed the stock's price-to-earnings ratio to nearly 150 (based on forward 12-month earnings forecasts) – nearly triple Facebook's P/E of 53, which itself looks too high for some investors' tastes. Thirteen out of 25 analysts covering LinkedIn still give the stock a "buy" recommendation (versus only one "sell" call), and the average 12-month price target on the stock is $130 – more than 30 per cent above current levels.

The key, analysts say, is LinkedIn's rapid revenue expansion, which has delivered profits sooner and bigger than the market had anticipated. Revenues over the past 12 months were more than double those of the year before, and the company has at least doubled its year-over-year revenues for seven straight quarters. Analysts expect revenues to jump another 60 per cent over the next 12 months. As a result, annual earnings per share, which were non-existent at the time of the IPO, are expected to increase sevenfold over the next year.

By comparison, Facebook's sales over the next 12 months are expected to grow a much more modest 33 per cent – and the expectations have recently been going in the wrong direction. Shortly before the IPO, several analysts within Facebook's underwriting syndicate cut their 2012 revenue forecasts by roughly 5 per cent, after the company expressed concerns that more of its users are migrating to mobile devices, where its advertising revenues to date are negligible. (The company only recently launched a mobile-advertising strategy.)

Analysts say LinkedIn's revenue model has two things going for it that Facebook doesn't: Job postings and paid subscribers.

Although paid, or "premium," subscribers are still only a small fraction of LinkedIn's total membership, premium subscriptions have been growing faster than membership in general – more than doubling the pace of overall user growth in the first quarter, the company said.

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"They've proven they can not only grow subscribers, but they can get more paid subscribers," Mr. Sweet said.

The company also now gets more than half its revenues from "hiring solutions" – under which employers use LinkedIn to advertise job openings and search for prospective hires. LinkedIn has rapidly become the leading website for professional job searches, and this is the fastest-growing segment of the company's business.

"What I really like about LinkedIn's model is there's an element of counter-cyclicality," said Tom Forte, analyst at Telsey Advisory Group in New York. "When times are bad, there are going to be more people looking for work."

LinkedIn's other big growth advantage over Facebook is its size. At more than 900 million users, Facebook has a lot less room to grow its member base than LinkedIn, which has about 160 million users.

"[LinkedIn]is still significantly ramping up their audience," Mr. Forte said.

"Both are excellent companies. It's just that Facebook is much further along in their development."

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Tale of the tape



Price (May 29)



% returns since IPO



Returns since FB’s IPO



Market cap



Revenue (2011)



Revenue (2012 forecast)



Number of users (March 31)

161 million

901 million

User growth vs. yr.-ago



*May 18, 2011 **May 18, 2012

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