Below we previewed LNKD’s Q3 results. I am hard pressed given the expectations, and investors sentiment toward large cap internet stocks that LNKD can rise on anything other than a sizable beat and raise. But after looking at multiple inputs heading into the print I lack the conviction to place a trade betting on lower prices as the high prices of options make the margin of error very slim. Here is how I would play if I were looking for a decline or move higher inline with the implied move of about 9% in either direction:
Hypothetical Bearish Trade:
LNKD ($200.50) Buy the Oct 31st weekly 200/180/160 Put Fly for about 5.00
-Buy 1 Oct31 200 put for 8.25
-Sell 2 Oct31 180 Puts at 1.75 each or 3.50 total
-Buy 1 Oct31st 160 Put for .25
Break-Even on Oct31 expiration (tomorrow):
Profits: btwn 195 and 165 make up to 15 with max gain of 15 at 180, down 10% basically in line with the implied move.
Losses: Btwn 195 and 200 and btwn 160 and 165 lose up to 5, with max loss of 5 below 160 and above 200
Rationale: This is a very binary trade with one day to expiration, so you would need conviction because if you get the direction wroing you will lose the entire premium paid. So think about it this way, you need to get direction right, magnitude of the move and timing. This is largely why we are not involved even though we lean short.
Or For Those Looking to Play for a pop inline with the implied move, a Hypothetical Bullish Trade:
LNKD ($200.50) Buy the Oct31 weekly / Dec regular 220 call spread for 4.50
-Sell weekly Oct31 220 call at 2.00
-Buy Dec 220 call for 6.50
Break-Even on Oct31st weekly expiration:
-Max profit at 220, large moves above or below and risk full premium,
Rationale: This structure sets up for a move back towards highs into year end but finances that December call by selling the move in the weeklies at a much higher volatility. Of course if LNKD goes straight to 240 on earnings this will have been the wrong structure to get long but the risk is small on a percentage basis and the trade itself won’t really lose money unless the move is massive to the upside.
Original Post Oct 30th, 2014: $LNKD Q3 Earnings Cheat Sheet
Event: LinkedIn (LNKD) reports Q3 results after the close tonight. The options market is implying about a 9% one day move in either direction, which is essentially inline with the 4 qtr average of about 9%, but slightly below the lifetime average of about 10%.
Sentiment: Despite the stock’s ytd under-performance, Wall Street analysts remain fairly bullish on the stock with 28 Buy ratings, 13 Holds and No Sells, with a 12 month price target of about $240, or about 20% higher than the current level. Short interest has risen of late, nearing 52 week highs at about 7.5% of the float.
Options Open Interest: Total options open interest is only about 166,000 contracts, fairly evenly matched with 80,000 calls and 86,000 puts, but calls represent seven of the ten largest strikes of open interest. The single largest open strikes: 4600 Jan15 220 calls, 2500 Jan15 180 calls, 2000 Nov 230 calls, 2000 Jan15 230 calls, 2000 Jan15 200 calls, 2000 Jan15 210 calls, and 2000 Jan15 240 calls.
Volatility Snapshot: 30 day at-the-money IV is slightly higher than prior to where it was into the Q2 print in early August, but well below levels of the quarters reported in Jan and April. I would expect IV to drop to the mid 30s post the event.
Price Action / Technicals: LNKD’s 8.5% year-to-date decline tells the story of under-performance vs. the broad tech market and peer Facebook. However, the recent price action sheds little light on the massive range it has traded in in 2014, making a high of $235 in January and a low of $136 in May. The stock is 15% from the highs, and 45% from the lows:
The one year chart of LNKD shows the significance of the $200 level as it was the breakdown level from the spring that was followed by a 30% decline until the May bottom. At this point, $200 looks like precarious support at best.
On a longer term basis, the five year chart shows the uptrend that has been in place since the lows in 2011 (green), and what I would suggest would be crucial level on a break of $200. $150 is near both the uptrend line and the May lows:
Our View: As we have mentioned on many occasions over the last couple weeks, large cap internet stocks have performaed very poorly with basically none rising the day aftter their report, from yesterday’s MorningWord:
AMZN -8.3% on 10/23/14
EBAY -4.7% on 10/15/14
GOOGL -2.6% on 10/16/14
NFLX -19.3% on 10/15/14
P -13.5% on 10/23/14
TWTR -9.8% on 10/28/14
YELP -18.6% on 10/22/14
FB – 6% on 10/29/14
You kind of get the point. Could LNKD be the one outlier (aside from YHOO), of course it could, and on a day like today where the broad market feels like it wants to party, its hard to take a dim view of non-commodity related stocks.
At this point, much like FB, Q3 is likely IN the stock, and its really all about forward guidance, which current consensus for 32% earnings growth and 37% sales growth (YoY) looks a bit aggressive given some of the commentary from competerors.
The set up looks to be one for sale on the news, but we have not made up our minds yet on how to express that view given the fact that the prices of short dated options leave little room for error.
Stay tuned as we are working on trades.
Estimates/Forecasts per Bloomberg:
3Q adj. EPS est. 47c (range 37c-56c); July 31, LNKD forecast ~44c
3Q rev. est. $557.4m ($543m-$577m); LNKD forecast $543m- $547m
3Q Ebitda est. $141.3m ($127m-$153m); LNKD forecast adj. Ebitda $134m-$136m
4Q adj. EPS est. 52c (range 28c-63c)
4Q rev. est. $611.7m ($590m-$649m)
4Q Ebitda est. $157.9m ($134m-$177m)
2014 adj. EPS est. $1.87 ($1.53-$2.03); LNKD forecast ~$1.80
2014 rev. est. $2.18b ($2.14b-$2.23b); LNKD forecast $2.14b- $2.15b
2014 Ebitda est. $558.7m ($468m-$587m); LNKD forecast adj. Ebitda $545m-$550m
NOTE: July 31, LNKD said “over” 300m members at end of 2Q