LinkedIn's stock is up about 12% since the company reported better-than-expected second-quarter results. With a valuation that already seemed tough to wrap your head around, I think it's time to return to the reason this business is performing so well in the first place: It has a very large addressable market nearly locked down.
It's not all about ads
Only 24% of LinkedIn's total revenue comes from ads. As the world's largest professional network on the Internet, the company is attracting substantial revenue from both businesses and professionals. Businesses are paying LinkedIn to help them recruit, and many members are gladly forking out extra cash for the company's premium accounts.
All parties involved at LinkedIn benefit from the platform's growth. With every additional professional or corporate customer, the platform becomes more useful for members, corporate customers, and marketers. The more useful the platform becomes, the more willing stakeholders' will be to rely on its services. In other words: The larger the network, the greater the value to all stakeholders involved. That's the power of a network effect, a competitive advantage I consider second to none.
But the network effect can only serve to attract a large number of new customers until it runs into the end of its addressable market. Where is the end of LinkedIn's addressable market? A long way away.
Just scratching the surface
LinkedIn's largest segment, talent solutions (56% of total revenue), is largely influenced by corporate customers. In the company's second-quarter earnings call, management noted that LinkedIn now serves over 20,000 corporate customers -- up about 66% from the year-ago quarter. It's probably no coincidence that the segment's year-over-year revenue growth rate of 69% is in line with corporate customer growth.
When will LinkedIn begin to see signs of saturation in corporate customers? The field of potential corporate clients is estimated to be 200,000 in total.
What about LinkedIn's members? Membership is up about 37% from the year-ago quarter to 238 million. Currently, LinkedIn is focused on knowledge workers, which CEO Jeff Weiner says is about 600 million on a global basis. But over the long haul, LinkedIn would like to become a solution for the global workforce as a whole -- that means 3.3 billion people.
So forget P/E ratios. LinkedIn's growth story is just beginning.
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The article Understanding LinkedIn's Addressable Market originally appeared on Fool.com.
Fool contributor Daniel Sparks has no position in any stocks mentioned. The Motley Fool recommends LinkedIn. The Motley Fool owns shares of LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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