Linkedin Offices

Source: LinkedIn

Social networks such as Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) tend to gather more attention from investors than LinkedIn (NYSE:LNKD). However, LinkedIn has a materially different business model offering solid competitive strengths and abundant opportunities for growth. This business model is the main reason I'm planning to invest in LinkedIn for years to come.

One of a kind
Both Facebook and Twitter generate most of their revenues from online advertising. This is a promising industry that should continue growing at a considerable speed as global consumers spend an increasing share of their time online.

However, competition in the space is tough with dominant industry juggernauts such as Google. While LinkedIn has a sizable presence in online advertising, the company makes most of its money from talent solutions, which comprised 61% of revenues last quarter, while premium subscriptions and marketing solutions accounted for 20% and 19% of revenues, respectively.

The talent solutions segment consists of recruiters and hiring companies who pay LinkedIn to have access to potential job candidates. Premium subscriptions offer different plans for LinkedIn members to upgrade the service, it offers tools to enhance job search, sales or networking capabilities, among others. Marketing solutions is basically online advertising.

LinkedIn is the top player in professional contacts and recruiting. The company has the first-mover advantage, and it benefits from the network effect. Members get more value from the platform as it grows in size, providing access to a larger number of recruiters and professional contacts. Recruiters and hiring companies in turn benefit from having access to a growing network of potential candidates.

Opportunities attract competition, and no company is immune to competitive risk. Facebook is reportedly developing a new website called Facebook at Work, allowing users to keep their personal profile separate from their work profile to better serve their professional needs. It makes sense to assume that LinkedIn will face rising competitive pressure from Facebook and other players in the future.

However, that's what competitive strengths are for -- to keep competitors at bay and to protect the company's business. The network effect is a major competitive advantage for LinkedIn, and the company's focus and specialization make it unique among potential players in the industry.

The opportunity
LinkedIn had 332 million members as of the third quarter, a 28% increase versus the same quarter last year, and we're barely seeing the tip of the iceberg at this stage. Management estimates that LinkedIn's addressable market includes 600 million "knowledge workers" in the near term. On a longer time frame, LinkedIn intends to become a valuable solution for the whole global workforce, which includes a massive 3.3 billion people.

In terms of revenue, LinkedIn calculates that its total addressable market is in the area of $30 billion annually over the long term. That's almost 14 times its revenue guidance of $2.18 billion for 2014.

These kinds of estimations are always subject to errors and revisions, but the fact remains that LinkedIn is growing at full speed as of the last quarter, and performance is exciting across the board.

Total sales grew 45% to $568 million during the last quarter, and each of the company's three business segments delivered revenue growth of more than 40%. Talent solutions grew 45% to $345 million, premium subscriptions increased 43% to $114 million, and sales in the marketing solutions segment jumped 45% to $109 million. 

LinkedIn is actively investing for growth, so reported earnings are being materially affected by the cost of these investments. Cash flows paint quite a promising picture though. Cash flows from operations amounted to $181 million during the third quarter, a 46% increase versus $126 million in the same quarter of 2013.

Interestingly, LinkedIn is also attractively valued in comparison to both Facebook and Twitter. The stock trades at a price-to-sales ratio below 14 versus 19 and 23 for Facebook and Twitter, respectively.

The three companies trade at demanding valuations, reflecting investor expectations for substantial growth from players in the sector. However, considering LinkedIn's diversified growth engines and undisputed leadership in professional contacts and recruiting, the current entry price looks relatively attractive.

Andrés Cardenal owns shares of Google (C shares) and LinkedIn. The Motley Fool recommends and owns shares of Facebook, Google (A and C shares), LinkedIn, and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.