Macro Wrap – Social Distortion? $FB, $LNKD

by Enis October 25, 2013 8:36 am • Commentary

Facebook and LinkedIn report earnings next week.  Both companies came into existence almost 10 years ago, and both have rapidly become the leaders in the social networking space.  Facebook is the social behemoth, while LinkedIn is the professional juggernaut.

Interestingly, the stocks also both took a similar path after hot IPOs.  LNKD IPO’ed in mid-2011, but quickly fell 50%.  After building a 6 month base, the stock almost doubled in 2012, and has more than doubled again in 2013.  FB IPO’ed in mid-2012, and promptly fell more than 50% as well.  The stock did rise up to the mid-30’s in January after a 6 month base, but was rejected after a weak earnings number.  But the stock has more than doubled since July’s blowout report, and is near all-time highs now as well.

I see some reasons for a potential divergence in fortune, however.  First, as I noted in my CotD post about the Four Horsemen on Wednesday, the technicals look weaker for LNKD.  Whereas FB is still in a healthy uptrend of higher highs and higher lows, LNKD has struggled to rally in the past 6 weeks.  FB’s huge run since July has been on major accumulation volume on each rally (see my CotD from Sept).  While FB is quite overextended in the short run, the technicals show clear institutional demand, which will likely support the stock on any weakness in the coming months.

On the fundamental side, both stocks are highly valued, with LNKD priced at around 75x its 2015 expected earnings, and FB priced at about 40x its 2015 expected earnings.  LNKD is expected to grow earnings around 50%, while FB is expected to grow earnings around 35%.

But in the long run, I prefer FB, mainly since their advertising model, particularly in mobile, clearly has advertising appeal.  While this quarter is crucial to affirm that FB’s second quarter strength was no fluke, the business trends are pointing to the fact that FB is finally starting to bear the fruit from its massive user base.  In contrast, LNKD has more potential competition (though the longer it goes as the dominant professional network, the more entrenched it becomes), and a revenue model that is not as proven in my eyes as FB.

We have discussed a long FB / short LNKD pair trade with options, but are holding off given the volatility of these stocks on earnings.  However, my hunch is that 6 months to a year from now, FB will be clear leader among social stocks, while LNKD’s prior stock performance may not exactly be indicative of future results!