Yesterday we previewed LNKD’s Q4 earnings report expected tonight after the close (below) and our takeaway was that we did not have a clear directional bias. The options market seems to price the move as being fair to historical, but I wanted to make one other point. After the company reported their Q3 back in early Nov, the stock gapped up 8%, slightly below the implied move, but the opening print that morning was the high, and the stock spent the rest of the day giving back the initial gains to almost close on the low of the session, virtually unchanged on the day (highlighted by green circle).
[caption id="attachment_22472" align="aligncenter" width="490"]
LNKD Nov 2012 chart from Bloomberg[/caption]
The stock obviously went on to recover after selling off with the broad market over the following 6 trading days, but what I find most interesting about the price action is that LNKD closed in almost an identical spot the day earnings and the 2 days after. Apparently there were as many who wanted to sell the stock as wanted to buy and seemed generally unfazed by the results.
The set up into earnings is not exactly screaming to be traded, there doesn’t seem to be a tremendous amount of edge in how the options market is pricing the event, but outright premium purchases will need out-sized moves to make money. Based on last quarter’s results and price action, recent competitor results, and current sentiment, we are hard pressed to to think an out-sized move is in order.
If you had a directional bias with conviction, the trades that make the most sense would be Butterflies, isolating the implied move. Here are a couple of examples, these are one day trades specifically focused on earnings, if the stock doesn’t move both would be total losses on tomorrow’s close. But if we had to chose we like the risk reward of flies over outright calls or puts. We are NOT trading either of these.
BULLISH:
LNKD ($124.50) Buy Feb8th wkly 130/135/140 Call Fly for .75
-Buy 1 Feb8th wkly 130 call for 2.55
-Sell 2 Feb8th wkly 135 calls at 1.15 each or a total of 2.30
-Buy 2 Feb8th wkly 140 call for .50
Break-Even on Friday Expiration:
-Profits btwn 130.75 and 139.25, make up to 4.25, max gain of 4.25 at 135 (up 8%)
-Losses of up to .75 btwn 130 and 130.75, and btwn 139.25 and 140, with max loss of .75 below 130 and above 140.
OR
BEARISH:
LNKD ($124.50) Buy Feb8th wkly 120/115/110 Put Fly for .75
-Buy 1 Feb8th wkly 120 put for 2.85
-Sell 2 Feb8th wkly 115 puts at 1.30 each or a total of 2.60
-Buy 2 Feb8th wkly 110 put for .50
Break-Even on Friday Expiration:
-Profits btwn 119.25 and 110.75, make up to 4.25, max gain of 4.25 at 115 (down 7.5%)
-Losses of up to .75 btwn 120 and 119.25, and btwn 110 and 110.75, with max loss of .75 below 110 and above 120.
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Original Post Feb 6th, 2012: $LNKD Q4 Earnings Preview
Event: LNKD reports their Q4 earnings tomorrow night after the close. The options market is implying about a 8%* move vs the 6 qtr avg move of ~8.5% (company has only been public for 6 qtrs). In this trailing 6 qtr period, there have been 3 up moves which have averaged 13.5%, and 3 moves lower that have averaged 3.45%.
* with the stock trading ~$125, the Feb8th weekly 125 straddle is offered at ~$10. If you bought it u would need at least a $10 move higher or lower from $125 to make money, thus 8% implied.
Sentiment: Wall Street analysts are generally positive on the stock with 16 Buys, 13 Holds and no Sells with an avg 12 month price target of ~$133. Short interest sits at a tad over 6% of the float.
Options Volumes / Open Interest: Open interest has been skewed towards calls, but over the last 3 weeks it has evened out, with call to put ratio back up to 0.9. Call volumes have been more active than puts by a 1.65 to 1 average over the past 20 days.
The largest individual lines of open interest are in Feb16 expiration: 5300 of the Feb 125 Calls, 3600 of the Feb 120 calls, 2500 of the Feb 130 calls and 2500 of the Feb 110 Puts.
Price Action / Technicals: LNKD has essentially traded in its own universe since going public in May 2011, and is probably the only internet IPO of the last 2 years to never have broken its IPO price. The stock is up almost 10% this year already, and flirting with new all time highs.
The chart below shows the strong uptrend that has been in place since the all time lows in late 2011, and is now forming an wedge pattern that looks prone to break one way or the other. On the downside, the stock should see healthy support btwn its 200 day moving average around $110 and the uptrend of $115. Your upside guess is as good as mine as there is no resistance overhead.
[caption id="attachment_22407" align="aligncenter" width="589"]
LNKD chart since 2011 IPO from Bloomberg[/caption]
Valuation / Fundamentals: Given the company’s growth expectations off of a very low base, there are few valuation metrics that make any sense to justify owing the stock. GS, who rates the stock a Buy with a $157 12 month price target, in their quarterly preview on Jan 20th had the following to say about the quarter:
We expect LinkedIn’s 4Q results to materially exceed consensus expectations when it reports February 7. Our channel work suggests that Recruiting and Marketing Solutions were particularly strong and we expect that strength to flow into margins. We expect revenue of $289 mn vs. consensus at $279 mn and guidance of $270-$275 mn, and EBITDA of $62.6 mn vs. consensus of $61.8 mn. While we expect typically conservative initial guidance for 2013, we believe investors will focus more on outperformance in the core businesses and potential in new initiatives like retargeting in Marketing Solutions and Sales Navigator in Premium Subscriptions. In our opinion, LinkedIn continues to represents one of the best secular growth opportunities in the internet sector.
Vol Snapshot: Feb8 weeklies are pumped vol wise with the 10 dollar atm straddle coming in at about 122 vol. Feb regulars are about 67 vol and March about 44. Historically this isn’t even that high as LNKD’s average vols have steadily down-trended since its IPO:
IV30 vs HV30 from LiveVol Pro[/caption]
Vol in Feb and March should come into the 30’s following earnings as average vol seems to make new lows every cycle.
My View: LNKD is not a stock I could ever get myself to own for anything other than a trade. While the company has a massive first mover advantage, I can envision many scenarios where FB could eat into their profit margins by offering similar services for free in an effort to break into LNKD’s premium services. I recently joined LNKD (the first social network that I have ever been a member of) and struggle with issues as simple as its existence. As an individual or a small business I can’t envision myself paying for any of their premium services and I refuse to be advertised. So I am not entirely sure a company like this will ever grow into its valuation. All that being said, the stock is a monster and as GS note above suggests, if consensus expectations are in fact low, and the company is able to deliver a meaningful beat and raise, the stock will very likely breakout to new all time highs. There is one caveat though for those of you who are true believers in stories like this, it is important to remember that rarely do this growth companies avoid and early hiccup with investors, and can likely come when least expected. As stated above implied vol heading into tomorrow’s print looks fairly muted to levels in qtrs past, and obviously that is a function of the realized vol, but complacency is ruling this market and this is the exact time it makes sense to watch you arse so to speak in names like LNKD.
We will look at different trade structures in the morning and post anything that sticks out to us.