Last night on CNBC’s Fast Money I highlighted a bullish trade in LinkedIn (LNKD). The company’s Q3 earnings are due tomorrow after the close. Watch here.
To recap, when the stock was $210, a trader paid $3 for 900 of the Oct 30th 220 / 230 call spread. This trade is fairly binary, if the stock is down on Friday’s open following results the trade will be dead in the water. The risk reward is not horrible, risking $3 to possibly make $7 if the stock is up in line with the implied move. But as regular readers know, to make money on long premium directional earnings trades you need to get a lot of things right, first and foremost direction, timing and magnitude of the move.
Event: The options market is implying a 10% one day move, which is inline shy of the 4 qtr average move of 13% and long term average of about 11%.
Sentiment: Despite the stock’s under-performance to large cap growth companies like AMZN & FB in 2015 (its down 8% on the year, and down 24% from its 52 week highs made in February) Wall Street analysts remain fairly bullish on the stock with 33 Buys ratings, 10 Holds and only 2 Sells with an average 12 month price target of $252.
Technicals: The one year chart below shows the 4 massive gaps in the stock following the last 4 earnings announcements, the last two down, the prior two up:[caption id="attachment_58048" align="aligncenter" width="600"] LNKD 1yr chart from Bloomberg[/caption]
On a longer term basis, looking at the 5 year chart below, $250 should serve as important long term technical resistance, while $150 on the downside huge technical resistance, while the August low of $165 serving as a decent target on the next move below $200:[caption id="attachment_58049" align="aligncenter" width="600"] LNKD 5 year chart from Bloomberg[/caption]
Expectations: RBC Capital’s Mark Mahaney who rates the stock a Buy with a $275 price target, highlighted the following as key factors to watch in the quarter in a note to clients:
1) Talent Solutions revenue and metric trends – We expect Q3 Talent Solutions revenue to grow 40% Y/Y to $484MM, on the back of 30% Y/Y growth in the number of Corporate Solutions customers to 39,425 at the end of Q3 (implying 2,000 Net Adds);
2) Marketing Solutions revenue and metric trends – We anticipate 22% Y/Y segment revenue growth to $133MM in Q3, driven by 35% Y/Y growth in the number of Page Views and a 10% Y/Y decline in Revenue per Page View;
3) Premium Subscription revenue and metric trends – We are modeling Q3 Premium Subscription revenue growth of 17% Y/Y, growing to $133MM in revenue, with 19% Y/Y growth in registered members to 395MM
Estimates & Forecasts from Bloomberg
- 3Q adj. EPS est. 45c (range 34c-67c); LNKD forecast 43c
- 3Q rev. est. $756.2m (range $745m-$768m); LNKD forecast $745m-$750m
- 3Q Ebitda est. $152.9m (range $146m-$169m); LNKD forecast $146m-$148m
- 4Q adj. EPS est. 66c (range 55c-79c)
- 4Q rev. est. $846.4m (range $822m-$880m)
- 4Q Ebitda est. $198.3m (range $193m-$208m)
- 2015 adj. EPS est. $2.23; LNKD forecast $2.19
- 2015 rev. est. $2.95b; LNKD forecast ~$2.94b
- 2015 Ebitda est. $674.5m; LNKD forecast ~$665m
Valuation: this has always been a rub for these high growth net stocks, but in Mahaney’s note to clients he takes a crack at justifying his $275 price taregt;
Our LinkedIn price target is $275, which we reach by applying a 30x EV/EBITDA multiple to our 2016 EBITDA estimate of $997MM and a 10x P/S multiple to our 2016 revenue estimate of $3.84B, and rounding up. These multiples represent a premium to most of LinkedIn’s Internet peer group. However, we feel that they are justified due to the company’s substantial growth outlook – we would note that LNKD’s 32%+ 3-year EBITDA CAGR is one of the highest in the ‘Net space.
My Take: LNKD has seen a meaningful earnings and sales growth deceleration in 2015, which accounts for the stock’s under-performance to largest on-the-line stocks like AMZN, FB & GOOGL that have maintained or grown sales gains off of much higher bases. If the company were to print a beat and raise it will very likely see a pop back to the July highs in the mid $230s in line with the implied move. A miss and a guide lower and the stock, similar to TWTR’s initial reaction and the stock is down 10% in a quick.
What’s the Trade?
LNKD has rallied nearly 25% from the August flash crash but has yet to show it can work its way higher than the downtrend. For those that are long and looking to replace stock with defined risk or those looking to enter into a bullish position but worried about the event, there’s a defined risk options trade that we prefer to long stock here:
Hypothetical Stock Alternative – LNKD ($212.70) Buy Nov 210/230/250 call butterfly for $4.30
-Buy 1 Nov 210 call for 14.00
-Sell 2 Nov 230 calls at 6 ($12 total)
-Buy 1 Nov 250 call for 2.30
Break-Evens on Nov Expiration:
Profits: between 214.30 and 245.60 of up to 15.70, with max gain of 15.70 at 230
Losses: of up to 4.30 between 210 and 214.40 and between 250 and 245.60, with max loss of 4.30 below 210 and above 250
Rationale – This trade structure defines potential losses to 4.20 but offers profit potential of up to 15.60 if the stock is back near its highs of the Summer. Profits trail off above that but 230 should serve as resistance.