LinkedIn's stock surged to its highest levels in seven months after a Goldman Sachs analyst predicted the Internet's largest professional networking service will play an increasingly instrumental role in employers' quest to hire the most talented workers.
THE SPARK: In a report issued Wednesday, Goldman Sachs analyst Heath Terry upgraded his rating on LinkedIn stock and predicted the stock will hit $135 within the next year. That would surpass the all-time high of $122.70 that LinkedIn's shares reached on their first day of trading 10 months ago.
Terry became more optimistic after studying the usage trends on LinkedIn and evaluating how valuable its digital rolodex of more than 150 million resumes is becoming to employers. He expects the effectiveness of LinkedIn's recruitment tools to lure more companies into signing up for subscription services that provide more insights into LinkedIn's users.
Only 9,200 customers had signed up for LinkedIn's corporate solutions products, about 5 percent of the roughly 200,000 potential customers that LinkedIn has identified worldwide. Terry expects LinkedIn to sell subscriptions to more than 25 percent of its potential customers by 2016.
LinkedIn already gets about two-thirds of its revenue from subscriptions and other fees it collects for broader access to user profiles and other special privileges. The rest of LinkedIn's revenue comes from advertising, another area where Terry says the company should thrive as more marketing dollars shift to the Internet during the next three years. LinkedIn also is attracting more usage from smartphones and other mobile devices, according to Terry.
THE BIG PICTURE: The company, which is based in Mountain View, Calif., already has established itself as one of the biggest successes among a crop of Internet services that specializing in connecting people with common interests.
LinkedIn's earnings more than tripled last year to $11.9 million while its revenue more than doubled to $522 million. Terry projects LinkedIn's annual revenue will climb to $875 million next year and hit $1.9 billion in 2014. He expects LinkedIn's earnings per share, excluding certain costs, to be 68 cents per share, more than doubling from last year's adjusted earnings per share of 35 cents.
THE ANALYSIS: "We believe there is considerable value in the user base, data, and connections in LinkedIn's network to be recognized through new products and services...yet to be developed," Terry wrote. "While this option value is certainly represented to some degree in forward estimates, we believe the potential for it to go well beyond expectations is significant."
SHARE ACTION: LinkedIn's stock climbed to $7.37, or 8 percent, to $99.21 in afternoon trading Wednesday. Earlier in the session, it traded as high as $101.11 -- the highest price since last August. The shares have traded as low as $55.98 since being priced at $45 in LinkedIn's IPO.