LNKD Q3 Earnings Preview

by Dan November 1, 2012 11:26 am • Commentary

Event: LNKD reports Q3 earnings after the close tonight, the options market is implying about a 11% move vs the ~9.5% avg over the last 5 qtrs since going public in 2011.  

Sentiment:  Wall Street analyst remains overwhelmingly positive on the stock with 17 Buys, 9 Holds and No Sells, with an avg 12 month price target of about $133.  Investors are decidedly less bearish on the stock than they were last year, with short interest down substantially to about 6% of the float.

Price Action:  LNKD is a fairly interesting story given its 70% gains ytd, and its nearly 140% gains from its IPO price in May 2011.   Since making a new all time high in Sept, the stock is down 14% in sympathy with other tech high-fliers like AMZN and AAPL, but one of the few who have not given Q3 results and Q4 guidance.

Technicals:  The stock has spent the better part of the last 7 months above $100 level, using the $90 to $100 range as fairly steady support, while making a series of higher lows and higher highs, all through the summer holding the trend-line that has been in place since the Dec 2011 lows.

[caption id="attachment_18846" align="aligncenter" width="490" caption="LNKD 1 Yr Chart from Bloomberg"][/caption]

Fundamentals:  The company has 3 major business units, Hiring solutions, Marketing solutions and Premium Subscriptions, all groups growing btwn 60 and 90% year over year.  International expansion is key to future growth, with 2/3 of their recent new members coming from outside the U.S.   This expansion comes at a cost, as operating expenses have been fairly high and any signs of reigning in such spending, while maintaing revenue growth rates would be met with enthusiasm by investors.  Given the mix of professional and individual user businesses, it is hard to categorize LNKD as purely an internet or a software services company.  In a note to clients dated Oct 29th, 2o12, Goldman had the following comments regarding their current business environment:

Engagement remains the biggest issue for LinkedIn with the average user visiting LinkedIn approximately 4.5 times per month, versus 29 for Google, 30 for Facebook, and 16 for Yahoo!, although LinkedIn users and visits are experiencing the fastest growth among that group.

LinkedIn continued to see strong traffic trends in 3Q with comScore reporting a 25% yoy increase in worldwide average monthly unique visitors (110mn in 3Q12 vs. 88mn in 3Q11) and a 57% yoy increase in total monthly visits.

Valuation:  Trading a stock like LNKD based on the its young, but healthy valuation seems like a fairly useless endeavor if history is any judge.  Stocks of companies like LNKD can stay at death defying heights far longer than most investors can stay short (see AMZN).  Looking at PE is basically useless, with this yr at 195x expected earnings and 88x next year based on consensus estimates expected to grow 120% year over year.  Another way to look at it, from Goldman Sachs note to clients dated Oct 29th, 2012:

LNKD trades at 29X 2013 EV/EBITDA, a premium to the Internet sector at 11X, yet below the SaaS sector at 41X. For comparison’s sake, LinkedIn’s 3-year CAGR is 87%, versus the Internet sector at 20% and the SaaS (software as a service) sector at 44%. We believe LNKD’s premium valuation is justified by the company’s faster relative growth rate, particularly when accounting for potential new incremental revenue streams that are not fully reflected in current estimates.

Volatility:   With only one day until expiration the Nov2 weekly vol is off the charts at more than 190 vol. Nov regular vol is around 70 with Dec in the low 50’s. Historically, the avg across all months is in the low 60’s which is high, but not as high as what LNKD has seen in previous earnings cycles. Here’s a look at historical average vols:

[caption id="attachment_18835" align="aligncenter" width="619" caption="IV vs HV from LiveVol Pro"][/caption]

Based on its history, expect a vol crush following earnings down into the 40’s, possibly the low 40’s depending on the stock move. Since Nov options are near 70, as vol could come in in the 30-40% range. Dec will see around a 20% decrease.

My View: Aside from AMZN, investors have taken a “shoot first, ask questions later” mentality on high-fliers that miss estimates of late (see CMG, PCLN, NFLX, GOOG), and LNKD could surely fall into that camp on any meaningful disappointment.  My sense would be that the recent blip in improving jobs data has buoyed the stock in the current tech malaise, as investors are willing to see if LNKD has all the attributes that growth investors are looking for among the fastest growing internet and software as a service companies.

We are evaluating a few different trades but regardless of your directional bias, selling Nov 2nd, or Nov 9th weeklies to finance the purchase of something longer dated could make a lot of sense.