Can LinkedIn Break Higher?

With shares of LinkedIn (NASDAQ:LNKD) trading around $224, is LNKD an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

LinkedIn is a professional network on the Internet with more than 90 million members in over 200 countries and territories. Through the company’s platform, members are able to create, manage, and share their professional identity online as well as build and engage with their professional network, access shared knowledge and insights, and find business opportunities. It’s platform also provides members with applications and tools to search, connect and communicate with business contacts, learn about career opportunities, join industry groups, research organizations, and share information. Networking and social contact is rising in importance for consumers and companies all around the world.

LinkedIn, the professional social network, posted third-quarter earnings that came in above expectations, but shares still fell due to lower expectations for the fourth quarter. The Wall Street Journal reports that LinkedIn has been growing by leaps and bounds since going public in 2011, but fourth-quarter revenue is only expected to grow between 37 percent and 38 percent, a sharp drop from the 56 percent growth seen in the third quarter. The company said the slowdown is due to faster-than-expected growth the company has seen recently. LinkedIn’s membership grew 38 percent from third quarter of last year.

T = Technicals on the Stock Chart Are Strong

LinkedIn stock has been surging higher in the past several months. The stock is currently trading at all time high prices and looks ready to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Linkedin is trading in between its rising key averages, which signal neutral price action in the near-term.

LNKD

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of LinkedIn options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

LinkedIn Options

45.64%

23%

21%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

November Options

Average

Average

December Options

Average

Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on LinkedIn’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for LinkedIn look like and more importantly, how did the markets like these numbers?

2013 Q3

2013 Q2

2012 Q1

2012 Q4

Earnings Growth (Y-O-Y)

50.00%

137.50%

400.00%

604.00%

Revenue Growth (Y-O-Y)

55.92%

59.37%

72.29%

117.68%

Earnings Reaction

-9.01%*

10.60%

-12.93%

21.26%

LinkedIn has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with LinkedIn’s recent earnings announcements.

* As of this writing

P = Excellent Relative Performance Versus Peers and Sector

How has LinkedIn stock done relative to its peers, Facebook (NASDAQ:FB), Google (NASDAQ:GOOG), Monster Worldwide (NYSE:MWW), and sector?

LinkedIn

Facebook

Google

Monster Worldwide

Sector

Year-to-Date Return

102.10%

87.27%

46.24%

-21.90%

54.42%

LinkedIn has been a relative performance leader, year-to-date.

Conclusion

LinkedIn allows consumers, companies, and groups to network worldwide from the comfort of their computers. A recent earnings release left investors pleased sinced it exceeded expectations. The stock has been surging higher in the past several months and is now trading at all time highs. Over the last four quarters, earnings and revenues have been rising, which has kept investors in the company pleased. Relative to its peers and sector, LinkedIn has been a year-to-date performance leader. Look for LinkedIn to continue to OUTPERFORM.

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