Event: LinkedIn (LNKD) reports Q4 results tonight after the close. The options market is implying about a 12% one day move which is essentially in line with the average one day move over the last 4 quarters of about 12.6%, and mildly rich to the nearly 11% average over the 18 quarters since going public in 2011.
Price Action / Techncials: LNKD is down 14% year to date, and down about 30% from its all time highs made late last February. The stock is up about 16% from its 52 week lows made on August 24th, a level it has yet to meaningfully test since. The one year chart below shows the stock’s massive gaps following earnings:
Drawing an uptrend from lows in 2011, following its May 2011 ipo at $45, its fairly clear connecting some of the dots that the stock is now approaching the long term uptrend, or below it depending upon how you draw the lines. Either way, I think its safe to say that the stock is either sitting on massive support or it’s now just below it:
Sentiment: Wall Street analysts are overwhelmingly bullish on the stock with 37 Buy ratings and 6 Holds with an average 12 month price target of $280, or 45% higher than current levels. Short interest sits at about 3% of the float.
Estimates and Forecasts from Bloomberg
-4Q adj. EPS est. 78c (range 74c-90c); LNKD forecast 74c
-4Q rev. est. $857.4m (range $845m-$886m); LNKD forecast $845m-$850m
-4Q Ebitda est. $217.2m (range $209m-$235m); LNKD forecast $210m
-1Q adj. EPS est. 75c (range 60c-98c)
-1Q rev. est. $867.1m (range $830m-$886m)
-1Q Ebitda est. $214.96m (range $177m-$237m)
My View: when the company reported their Q3 in late October they beat across the board with sales growing 37% year over year citing strength in Europe and specifically in their talent solutions group after initiating a price increase in the quarter.
LNKD is a great example of a stock whose valuation has a massive gap between adjusted earnings and GAAP. Consensus expects $2.69 adjusted for 2015, which is growing 33% year over year, trading at 72x 33% eps growth. On a GAAP basis, the company is expected to lose $1.54, which massively accelerated from the 0.13 loss in 2014. Sales growth while impressive at 35%, is expected to decelerate from 45% growth in 2014. This is ludicrous to me (valuation), and the slightest bit of disappointment and the stock is down 10%, at least. On the flip side, a beat and raise, and maybe the stock opens up 5% but I suspect it gets sold like Google did last week, like Facebook is doing now, and more likely tracks the performance of Amazon and Netflix which are down more than 15% from their earnings reports.
With that in mind… What are the Trades?
For those that are long the stock or had been looking to enter after this sell-off we really prefer defined risk trades in the options in lieu of long stock:
Stock Alt/ Replacement
In lieu of 100 shares of LNKD (192) Buy the March 190/220/250 call fly for 7.25
- Buy 1 March 190 call for $16
- Sell 2 March 220 calls at $5 ($10 total)
- Buy 1 March 250 call $1.25
Breakevens on March expiration:
Losses: of up to 7.25 with the stock 197.25 or lower with total loss of 7.25 below 190. Losses of up to 7.25 with stock above 242.75
Profits: of up to 22.75 above 197.25 and below 242.25 with max gain of 22.75 with the stock at $220.
Rationale – This targets a realistic move higher to 220 if the company were to beat and raise. But we think that sellers emerge higher as they have with other stocks in this space. The call butterfly starts slightly in the money with a breakeven about 5-6 dollars above where the stock is currently trading. But the big reason why this is a good trade versus being long stock is if the stock tanks on the event, the most that can be lost is 7.25, vs unimited downside in long stock.
LNKD (192) Buy the Feb5th weekly 185/165/145 put fly for 4.50
- Buy 1 Feb5th weekly 185 put for $7.65
- Sell 2 Feb5th weekly 165 puts at $1.60 ($3.20 total)
- Buy 1 Feb5th weekly 145 put for .05
Breakevens on Feb5th expiration (tomorrow):
Losses: of up to 4.50 above 180.50 with total loss above 185
Profits: of up to 15.50 below 180.50 and above 149.50 with max gain of 15.50 at 165 on tomorrow’s close.
Rationale – We’re not huge fans of taking directional bets on earnings moves as so much move is implied in the options and it’s so hard to get right. But if you really wanted to press a stock like LNKD it’s best to try to pick a spot to the downside and target it with a slightly out of the money put fly to try to reduce your premium at risk as much as possible. $165 is the August lows and a good spot to target for the event. This trade is very binary as it can easily be worthless tomorrow. But from a risk reward standpoint it offers nice exposure to that August low without risking too much in premium.
Expectations: Mark Mahaney, internet analyst at RBC Capital Markets, who rates the stock a buy with a $300 price target highlighted the following key issues to watch in tonight’s report:
1) Talent Solutions revenue and metric trends – We expect Talent Solutions revenue to grow 42% Y/Y to $525MM in Q4, decelerating from 46% Y/Y growth in Q3 and vs. the Street’s $529MM estimate. We are modeling a 28% Y/Y increase in the number of Corporate Solutions customers to 42.5K (vs. the Street’s 42.6K estimate).
2) Marketing Solutions revenue and metric trends – We expect Marketing Solutions revenue to grow 21% Y/Y in Q4 to $184MM, down from 28% Y/Y growth in Q3 and vs. the Street’s expectation of $180MM. We expect Unique Visitors to reach 101MM.
3) Premium Subscription revenue and metric trends – We expect Premium Subscription revenue to grow 17% Y/Y in Q4 to $142MM, decelerating vs. 21% Y/Y growth in Q3 and against the Street’s expectation of $145MM. We are also looking for 408MM Registered Members.
LinkedIn Guidance Expectations
We expect LinkedIn to provide Q1:16 and FY16 Revenue, EBITDA, and Non-GAAP EPS guidance, as is customary. Below are RBC and consensus estimates for the March quarter and FY16. We believe that the Street’s outlook for 2% Q/Q revenue growth in Q1:16 with a
25% EBITDA margin are bracketable, though not raise-able. Likewise, we view Street 2016 estimates – 31% Revenue growth with 26% EBITDA margin – as bracketable, but not raiseable.