Name That Trade – $LNKD: Leverage & Protection for Longs

by Dan August 1, 2013 2:04 pm • Commentary

Earlier this morning Enis previewed LNKD’s Q2 results expected after the close (below),  but I wanted to quickly lay out some thoughts on expectations for the quarter, our thoughts on the stock and layout a few observations from the options market and how we would be inclined to play on an outright basis or vs a long stock position.

First things first, there have been lots of comparisons of LNKD to FB, and to be fair, other than they are social networks, there are not too many similarities at the moment how they generate their sales (LNKD gets almost two thirds of their sales from Talent Solutions..hocking resumes).  FB’s sales come pretty much from advertising, and the upside in Q2 was driven by stronger than expected growth in mobile ads.  While mobile is important for LNKD, they are expected to get less than 25% of their sales in the qtr from advertising, but this is where the LNKD story could get  a little of the recent FB treatment, as the company has recently been focused on creating original content and intend to serve up more ads in the Newsfeed (here).  

Last quarter the company put up a solid beat with guidance that was below consensus and the stock sold off almost 13% from what was then an all time high.  Heading into tonight’s print, the stock is making a fresh new all time high, and while expectations for Q2 weren’t as high as where they were in April from an estimate standpoint, the stocks 30% rally since the start of June may suggest otherwise.

Couple Scenarios for Long Holders to Consider:

1. Long the stock and a true believer and want to add some juice to your long in the event of a 1 day FB sort of move:

TRADE: LNKD Long $210 Buy Aug 2nd (tomor Expiration) 220/230 1×2 Call Spread for even $

-Buy 1 Aug 2nd 220 call for 5.70

-Sell 2 Aug 2nd 230 calls at 2.85 each or 5.70 total

Break-Even on Aug 2nd Expiration (tomo):

-Profits of stock btwn 210 and 230, make 20, if stock 230 or above your stock is called away at 230 or up about ~9.5% but you have made an extra 10 or ~4.7%, so you have essentially sold the stock at 240 up 14.5% in a day. if stock btwn 220 and 230 make up to 10, plus the gains of the stock.

-Losses of the stock below 210


2.  Long the stock, but don’t want to sell but worried disappointing guidance could cause a sell off similar to last quarter and want some protection for the event, and willing to give away some upside:

TRADE: LNKD long $210 Buy Sept 230 – 205/185 Put Spread Collar for a  .50 credit

-Sell Sept 230 Call at 7.50

-Buy Sept 205 Put for 12.00

-Sell Sept 185 Put at 5.00

 Break-Even on Sept Expiration:

-Profits of stock btwn 210 and 230, stock called away at 230, up 9.5%

-Losses of stock btwn 210 and 205 and then again below 185.



Original Post Aug 1, 2013:  $LNKD Q2 Earnings Preview

Event:  LNKD reports their fiscal Q2 earnings tonight after the close.  The options market is implying about a 9.25% one day move, which is below both the 4 qtr avg of about 12.5% and the 8 qtr avg of about 10.5%.

Sentiment:  Wall Street analysts are somewhat bullish on the stock, with 16 Buys, 18 Holds and No Sells.  However, LNKD is up 80% in 2013, so analysts’ average price target of 205 is actually below the stock’s current level.  Short interest is minimal, at 4% of float.

Options Open Interest:  Open interest is about evenly split between calls and puts.  1 month volume has been skewed towards calls by a ratio of 1.5 to 1.  The Aug16th 200 calls, Aug16th 175 puts, Aug16th 210 calls, Aug16th 180 puts, and Nov 205 calls are the lines with the most open interest.

Price Action / Technicals:  The I posted a Chart of the Day on LNKD 2 weeks ago highlighting the importance of the May high around $203.  Since then, the stock has cleanly broken out above that level:

Daily chart of LNKD, 50 day ma in pink, Courtesy of Bloomberg
Daily chart of LNKD, 50 day ma in pink, Courtesy of Bloomberg

With the stock at all-time highs, there is no resistance on the upside.  On the downside, the $203 is initial support.  The longer-term support area comes into play near the 50 day moving average, around $185.

Fundamentals:  LNKD is the largest professional network on the web, boasting more than 200 million members worldwide.  The stock has more than quadrupled since its IPO in 2011 at $45.  It is projected to earn $1.50 in 2013, $2.10 in 2014, and $3.12 in 2015.  However, LNKD is one of the “platform” stories, where investors are more interested in the long-term profitability of the platform rather than traditional short-term valuation metrics.

Here is a good synopsis of analyst expectations into today’s earnings report from Cadie Thompson of

For the eight quarters LinkedIn has been a public company, it has beat analysts’ earnings and revenue estimates. But that perfect record has driven Wall Street to push its projections beyond the company’s forecast, increasing the pressure to deliver big results.

“We also note that consensus estimates for revenue and EPS, including ours, are above the high end of the company guidance, but the company has a history of actual results materially exceeding consensus,” said Colin Gillis, an analyst for BGC Partners, said in a note Tuesday.

LinkedIn is scheduled to report second-quarter earnings after the bell Thursday, and analysts forecast earnings per share of 31 cents on revenue of $354 million, according to Thomson Reuters. In year-earlier quarter, the company reported EPS of 16 cents on revenue of $228 million.

The company handily beat estimates in the first quarter, but the stock was actually lower.  As with other platform stories, membership growth and revenue growth might be the more important metrics to watch.

Volatility:   Implied vol is up into the event but earnings cycles have seen lower and lower IV highs since the stock went public. That’s due to 2 main factors. One, more is known about the company and there’s a tighter range of estimates and two, the stock price is higher which will tend to force IV to be lower due to the human psychology of what constitutes “big moves” in percentage versus dollar amounts. Here’s a look at the last two years:

Screen Shot 2013-08-01 at 9.09.17 AM
from LiveVol Pro

Aug vol is is about 66 with Sept about 47. Both are likely to be under 40 following the event.