$LNKD Q3 Earnings Preview

by Enis October 28, 2013 11:45 am • Commentary

Event:  LNKD reports its Q3 earnings tomorrow after the close.  The options market is implying about a 9% one day move, which is below both the 4 qtr avg of about 11.25% and the 8 qtr avg of about 11.5%.

Sentiment:  Wall Street analysts are somewhat positive on the stock, with 19 Buys, 15 Holds and 0 Sells, with an average 12 month price target of around $253.  The stock’s short interest stands at 3.5% of float.  Its high over the last 2 years was in early 2012, when it was around 9% of float (that happened to correspond quite closely to the low in the stock).  Stock is up more than 100% year-to-date.

Options Open Interest:  Open interest is evenly split between puts and calls.  The recent options activity has also been about evenly split over the last month.  Of the weekly options, the weekly 220 puts have the most open interest (almost 2k).  The Nov15th 250 calls and Nov15th 205 puts both have over 3k of open interest.  Outside of that, the Jan15 240 calls are the only other line with over 2k of open interest.

Price Action / Technicals:  For momentum stocks like LNKD, we spend more time than normal on the technicals since so much of what drives the price action is psychology.

Here’s what I wrote in my CotD post on Oct. 8th:

The stock has that unstoppable aura where even bad news has turned into good news…and a stock chart that shows that all-too-familiar pattern these days of breakout-consolidation-breakout-consolidation.

Here’s the lifetime weekly chart to illustrate its massive 2 year run:

Weekly chart of LNKD, Courtesy of Bloomberg

Weekly chart of LNKD, Courtesy of Bloomberg

The stock’s high shortly after its IPO was around $120, and that level served as stout resistance until February 2013, when the stock finally broke out from that level on earnings, and never looked back.  The stock then consolidated those rapid gains for a few months, until cleanly breaking out above $200 in July.

Since that Oct. 8th post, LNKD sold off to 213.50 and then rallied, which was almost a perfect gap fill vs. the August 1st close of $213, prior to its large earnings gap higher on August 2nd:

LNKD daily, Courtesy of Bloomberg
LNKD daily, Courtesy of Bloomberg

The 213.50 price is the clear level to watch on the downside.  On the upside, the all-time high in mid-September is $257.56.

Fundamentals:  This is what we wrote in our preview for last quarter:

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.

Those consensus estimates for earnings have now moved to $1.54, $2.21, and $3.37 respectively, though the stock is about 15% higher since the last earnings report as well.

Goldman Sachs’ fundamental team had a nice summary of the revenue growth in the various divisions:

Based on our checks with both recruiting and marketing customers, as well as strong traffic trends, we see modest upside to consensus forecasts for each of the company’s three segments.  We are forecasting Talent Solutions revenue of $215 mn (+55% yoy vs. +69% in 2Q), Marketing Solutions revenue of $85 mn (+33% yoy vs. +36% in 2Q), and Premium Subscriptions revenue of $81 mn (+62% yoy vs. +66% in 2Q).

Those are impressive growth rates.  But perhaps what’s most incredible to me is that the total revenue base for LNKD is around $1.5 billion per year.  That’s for a company with a market cap of almost $30 billion.  Valuations haven’t mattered for a while, so follow the price action.  But the company needs an awful lot of growth just to fill into its current valuation.

Volatility:  Implied volatility in LNKD is lower than it has been prior to the last 3 earnings releases:

LNKD 30 day implied vol (red) vs. 30 day realized vol (blue), Courtesy of LiveVolPro
LNKD 30 day implied vol (red) vs. 30 day realized vol (blue), Courtesy of LiveVolPro

Part of that is due to the low recent realized vol, but part of it also due to the fact that the stock price is much higher than it was a year ago, so the same dollar price move today translates into a much lower corresponding percentage move.

Having said that, the 9% implied move is lower than both the 4 quarter and 8 quarter averages (around 11-11.5%), so options are not necessarily expensive.

Our View:   As I said last month, investors don’t seem to be interested in short-term valuation metrics.  But with a weakening technical picture and a bloated valuation, the risk/reward of owning this stock just seems much too skewed towards risk to us.  That doesn’t mean it can’t go up.  But in the long run, this stock seems very unlikely to produce similarly exciting returns.