This article is the second of a series that started with my earlier article LinkedIn: Overvalued, But a Dangerous Short. Readers may consider first reading the earlier article to get the most out of this one.
As the chart below shows, most of the LinkedIn (LNKD) revenue comes from recruitment-related activities. Anyone who has been to the LinkedIn site would readily recognize that LinkedIn is mostly populated by unemployed looking for jobs and recruiters looking to fill assignments. LinkedIn has 100 million users, but revenue is a paltry $250 million. This translates to $2.50 revenue per member.
At present the stock market is valuing each LinkedIn member at approximately $100.
As the chart in the previous article shows, LinkedIn revenue is not keeping pace with the rise in its membership. Monster World Wide (MWW) operates the largest employment website in the world. Analysis at The Arora Reportshows that there are about 200 million resumes in the data base of Monster. The market cap of Monster is $1.86 billion. The market is assigning a value of $9.00 to each Monster member. Each Monster member generates approximately $5.00 of revenue.
There is a big disparity between $9.00 a member and $2.50 per member. The obvious question arises, “Why such a big disparity?” The answer lies in very different growth rates of the two companies.
LinkedIn is growing very rapidly as the chart in the previous article shows. Monster is stagnant (see below).
LinkedIn needs revenues. Monster can add almost a billion dollars in revenues to LinkedIn. Further, there are so many synergies between the two companies that it is not difficult to take as much as $100 million cost from the combined operations.
LinkedIn offering a stock that is valued based on $100 per member where a member generates only $2.50 of revenue - for stock of Monster that is valued based on $9.00 per member where a member generates $5.00 in revenues - is a no brainer transaction.
A potential marriage between LinkedIn and Monster is a match made in heaven. Several similar ideas are now close to meeting the buy criteria of the ZYX Change Method.
Disclosure: I am long MWW.
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