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Data Leak Affects LinkedIn

Zacks Equity Research

Professional networking major LinkedIn Corp. (LNKD) and online dating service eHarmony recently made public announcements that some of their online user passwords were stolen. Naturally, this resulted in growing concern among users, since personal and professional identities could be at stake.

Although the professional networking major did not provide the exact figure, the rough estimate of more than six million passwords (between LinkedIn and eHarmony) looks bad enough.

Although the members pays more charges for LinkedIn only for the SPEED at which it could grow earnings. A problem arises if it loses its reputation due to this leakage of sensitive information, which may affect its earnings going forward, often trigerring a catastrophic selloff, which has happened a couple times in LNKD share price history.

Here we consider the "Facebook (FB) for professionals" to be a great threat to LinkedIn paid services and perhaps the best gauge for the behavior of FB in the marketplace.

Over the last 18 months, the market has seen a number of social-media IPOs which include LinkedIn (LNKD), Groupon (GRPN), Pandora (P) and Zynga (ZNGA). But the recent incidence puts a question mark regarding their ability to protect data as most of them deal with sensitive information.

LinkedIn caters to more than 160 million members, which means that it often contains confidential information related to job seekers. Additionally, companies, recruiting services and others have accounts alongside individuals who post resumes and other professional information. Leakage of this information may result in business loss for them.

Although the LinkedIn promoter is on the board of Facebook, we believe that Facebook is well positioned to grow over the long term based on its large customer base and proven business model. The company enjoys a first mover advantage in the social networking market.

Although advertising revenue has somewhat slowed down in recent months, we note that non-advertising revenues increased fivefold in 2011. Nonetheless, information protection remains a concern for Facebook as well.

For LinkedIn, the macro economic outlook remains uncertain. The slowdown in Europe has adversely impacted the company’s business with no relief expected in the near term. Management expects another recession in 2012.

We have a  Zacks #3 Rank on LNKD shares, which translates into a short-term Hold rating.

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