$LNKD Q1 Earnings Preview – To Infinity & Beyond

Event: LNKD reports their Q1 earnings tonight after the close, the options market is implying about a 10% move on earnings vs the 7 qtr average since going public of about the same.

Sentiment:  Wall Street analysts are fairly mixed on the stock with 14 Buys, 15 Holds and No Sells with any avg 12 month price target of about $180.  Short interest is down to just below 5%, one of the lowest levels since the company went public in August of 2011.  The top 20 holders own nearly 60% of the shares outstanding.

The Put / Call ratio sits at about .88, with the largest open interest in the following lines: 3k of the May 155 puts, 3k of the May 165 puts, 2700 of the May 190 calls, 2500 of the May 200 calls and 2500 of the Aug 200 calls.

Price Action/Technicals:  As I write, the stock is trading at all time highs, up 72% on the year, there is no more overhead resistance.  The lifetime chart shows just how big the move has been for LNKD ever since its earnings gap in February:

LNKD lifetime daily chart, Courtesy of Bloomberg

LNKD lifetime daily chart, Courtesy of Bloomberg

The stock broke its longer-term 125 resistance area on that gap higher, and has not broken below its 50 day ma (pink line) ever since.  On a near-term basis the important level to watch on the downside is 185, which acted as minor resistance until it broke that level in late April.  On the upside, of course, there is no resistance.

Vol Snapshot: Vol continues to trend lower over time in LNKD since its IPO, which makes sense considering the rise in the stock to near 200. Previous earnings cycles saw higher IV than this one. Here’s a look at the IV30 (red) vs HV30 (blue) since the IPO:

Screen Shot 2013-05-02 at 9.09.34 AM

from LiveVol Pro

May IV is about 67 and June is about 47, expect to see both below 40 following the report.

Valuation/Fundamentals:  Much like its social media peer FB, an investor or a short seller of LNKD would be ill advised to make either decision based solely on valuation.  More specifically valuation shorts are NOT working in this market (see NFLX, TSLA & FSLR).  While the stock trades at an eye-popping 95x next year’s expected earnings, analysts expect earnings to continue to grow by ~50% a year through 2015. There are very few technology companies that have that sort of expected growth on what has the potential to be an infinitely scale-able business model.

Goldman Sachs, who rates the shares a Buy with a 12 month price target of $220, expects better than expected results and guidance, from a note to clients dated April 26th, 2013:

We expect LinkedIn’s 1Q results to exceed consensus expectations when it reports May 2, after the close. Our channel work suggests that Talent and Marketing Solutions were particularly strong and we expect that strength to flow into margins. We expect modest upside to our revenue estimate of $320mn vs. consensus at $317mn and guidance of $305-$310mn, and EBITDA of $75.6mn vs. consensus of $70.2mn. While we expect typically conservative guidance for 2Q, we expect management to raise full year 2013 to reflect the outperformance in its three core businesses and newer initiatives like retargeting in Marketing Solutions and Sales Navigator in Premium Subscriptions. In our view, LinkedIn continues to represent one of the best secular growth opportunities in the internet sector.

Expectations:

ESTIMATES/GUIDANCE from Bloomberg:

  • 1Q adj. EPS 31c (range 22c-41c)
  • 1Q rev. $318m (range $309m-$337m); Feb. 7, LNKD forecast 1Q rev. $305m-$310m
  • 1Q adj. Ebitda $72m ($67.5m-$81.7m); Feb. 7, LNKD forecast
  • 1Q adj. Ebitda $67m-$69m
  • 2Q rev. $359.7m (range $345m-$384m)
  • 2Q adj. Ebitda $84.8m (range $74.7m-$95.8m)
  • 2013 rev. est. $1.497b (range $1.44b-$1.62b); Feb. 7, LNKD forecast 2013 rev. $1.41b-$1.44b
  • 2013 adj. Ebitda est. $361.6m (range $328m-$405m); Feb. 7, LNKD forecast 2013 adj. Ebitda $315m-$330m

MY VIEW:   At this point for the stock to continue to work at its current rate of ascent, LNKD will need to put up a fairly significant beat and raise above Street expectations.  As I stated above, I wouldn’t short this stock with your money, But I am also not sure that true believers in the longer term story will find a purchase at the all time highs prior to a potentially volatile event as a good entry for new positions or a place to add to existing ones.  While I hate FB’s long term prospects (think MySpace in 5 years) I think more micro social networks like LNKD are the way forward.  This doesn’t mean I think the stock is a buy here, but for those looking for longer term secular winners in Social Media, LNKD is one of the few choices and given the tight concentration of top holders and shorts perceptually drawn to the stock due to valuation, the stock will likely continue to be bought on pullbacks until there is a marked deceleration in earnings growth.

We are looking at trade structures more geared towards vol than direction and will be sure to post anything that looks attractive.

 

 

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