Is LinkedIn a Good Portfolio Play?

With shares of LinkedIn (NASDAQ:LNKD) trading around $209, 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 an online professional network 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. Its 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 forecast sales that trailed analyst estimates, pushing the stock down as much as 9.6 percent, the most in three months, as growth slows in all three of the professional networking site’s businesses. Analysts on average projected sales of $469.4 million, according to data compiled by Bloomberg. LinkedIn, whose shares have more than quadrupled since the company’s 2011 initial public offering, is headed for its fifth straight quarter of decelerating sales growth. To expand its potential revenue base, LinkedIn is seeking to reach workers overseas, add mobile features, and make acquisitions.

The company said Thursday that it bought Bright Media Corp., an analytics company that helps match candidates with the right employers, for about $120 million in cash and stock. “LinkedIn is continuing to grow, but that growth is slowing because of a scaling up of the business,” said Steve Weinstein, an analyst at ITG Investment Research, to Bloomberg. “As you get bigger, it gets harder and harder to find a lever that can be material to growing your business.”

T = Technicals on the Stock Chart Are Weak

LinkedIn stock has been trading sideways in the last couple of quarters. The stock is currently pulling back and may need time to stabilize before heading higher. 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 below its rising key averages, which signals neutral to bearish 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

40.94%

0%

0%

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

Put IV Skew

Call IV Skew

March Options

Steep

Average

April Options

Steep

Average

As of Friday, there is average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bearish 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-70.24%

50%

137.5%

400%

Revenue Growth (Y-O-Y)

47.3%

55.92%

59.37%

72.29%

Earnings Reaction

-6.91%*

-9.31%

10.6%

-12.93%

*As of this writing.

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

P = Weak Relative Performance Versus Peers and Sector

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

LinkedIn

Facebook

Google

Monster Worldwide

Sector

Year-to-Date Return

-3.91%

17.59%

4.32%

8.27%

3.89%

LinkedIn has been a poor relative performer, year to date.

Conclusion

LinkedIn allows consumers, companies, and groups to network worldwide from the comfort of their computers. The company forecast sales that trailed analyst estimates, pushing the stock down as much as 9.6 percent. The stock has been trading sideways over the last couple of quarters and may need time to stabilize. Over the last four quarters, earnings and revenues have been rising, which has left investors in the company optimistic. Relative to its peers and sector, LinkedIn has been a poor year-to-date performer. WAIT AND SEE what LinkedIn does this coming quarter.

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