LinkedIn Will Be a Growth Driver for Microsoft
- From Dilantha De Silva
Microsoft Corp. (NASDAQ: MSFT) has been one of the big winners in the market over the past several decades, which is no surprise given the excellent earnings growth over the period.
The company was recognized as a leader in computer software at the turn of the 21st century, but has since grown exponentially to enter many lucrative industries such as cloud computing, video games, and even social media. In 2016, Microsoft acquired LinkedIn, the world's leading professional social media platform, for a whopping $ 26 billion. At the time, some investors criticized the move because the path to monetization was not clear. LinkedIn already contributes to the company's sales. According to a report released by The Information, the platform plans to open a new freelance marketplace by the fall, which could be a catalyst for Microsoft's earnings growth.
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LinkedIn has come a long way since the acquisition
With the completion of the acquisition, Microsoft began consolidating LinkedIn revenue from the second fiscal quarter of 2017. The social media platform had total sales of $ 228 million for the quarter. LinkedIn's revenue consists mainly of three products: Talent Solutions, Premium Subscriptions and Marketing Solutions. The number of LinkedIn users has grown exponentially to over 700 million in recent years as it has emerged as one of the best platforms for professionals to search for new career opportunities. As shown below, LinkedIn's quarterly revenue has grown rapidly over the past four years.
LinkedIn will be a growth driver for Microsoft
Source: Business Quant.
In the second quarter of the fiscal year that ended in December 2020, LinkedIn accounted for around 6% of Microsoft's revenue, and the contribution has grown steadily since 2017.
LinkedIn is tapping into a fast-growing industry
On February 19, The Information published an article about LinkedIn's plans to open a marketplace for freelancers on the social media platform. The idea is to help remote workers who are already active on LinkedIn find work opportunities without leaving LinkedIn. In an exclusive article on the subject, The Information wrote:
"LinkedIn is developing a new service called" Marketplaces "that will allow 740 million users to find and book freelancers, and will stand up to public companies like Upwork and Fiverr, according to two people with direct knowledge of the matter."
To make payments easier, LinkedIn is set to develop a digital wallet, which means freelancers never have to leave the platform to complete the transaction. Given the expected growth of concepts like home work and gig economy, the decision to open up this market could help Microsoft experience significant earnings growth over the next decade.
A billion dollar opportunity
According to Statista, there were more than 60 million gig economy attendees in the US in 2020, which is more than 37% of the total workforce. Statista expects subscriber growth of 90 million by 2028. This expected growth creates opportunities for freelance platforms. Several factors are driving this industry forward:
More and more professionals in all important economic regions of the world welcome the flexibility and freedom that are associated with the gig economy.
Multinational corporations have preferred to hire freelancers to work on projects rather than full-time employees to keep operating costs down.
The increasing rate of internet penetration in countries like India has made it possible for developed countries to hire freelancers based in these low-cost countries without having to worry about providing visas or maintaining a physical office.
All of these factors will contribute to the expected growth of the gig economy over the next decade, and LinkedIn's rumored market is likely to emerge as one of the biggest rivals for market share in this lucrative industry.
To gauge a measure of addressable market opportunity, an investor can review the financial performance of Fiverr International Ltd. (NYSE: FVRR) rate. After sales of just $ 52 million in 2017, Fiverr has grown exponentially over the past 12 months, generating sales of $ 190 million. The company is expected to break even in the next few years. LinkedIn, with its massive user base of over 700 million professionals, has the chance to steal market share from the existing market leaders in this industry, as the majority of freelancers are already using this social media platform and it is reasonable to assume that this will be the LinkedIn market used by many of these gig workers as the professional community is already familiar with this platform.
Microsoft could dominate some lucrative industries by 2030
In addition to this expected success in the LinkedIn marketplace, other Microsoft products such as Office 365, Azure, and Xbox will help the company dominate some high-growth industries and achieve better than expected results over the next several years. Despite the size of the company, Microsoft cannot be classified as a mature company due to its strong presence in rapidly growing businesses.
The rating is appropriate
One of the main barriers to investing in high-growth tech companies is the sky-high valuation multiples at which these stocks trade. Although Microsoft's share price has risen 370% over the past five years, it still trades at a reasonable forward earnings multiple of 33.18, slightly above the information technology sector's price-to-earnings ratio of 31.99 lies. Given that Microsoft posted 14.18% year-over-year revenue growth compared to the industry average of just 6.34%, Microsoft deserves to trade at a premium over its competitors.
Microsoft is one of the busiest companies on Wall Street, but little is said or written about LinkedIn and why it will be a powerful driver of the company's top line in the years to come. The anticipated launch of the freelancer market later this year will be a catalyst for LinkedIn's revenue growth, and Microsoft is moving in the right direction to monetize the 740 million users of this social media platform. The expected user growth will also help the company improve its average revenue per user as advertisers are likely to offer higher amounts for ad space on the platform. LinkedIn remains under-monetized, and Microsoft stocks appear to be undervalued.
Disclosure: The author does not own any stocks mentioned in this article.
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