Monday, August 11, 2014

* LinkedIn (LNKD) - Stock Explodes; How Option Market Blew Earnings & Why LNKD is Different than Every Other SOCL

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LNKD is trading $212.78, up 2.2% with IV30™ down 2.1%. The Symbol Summary is included below.

Provided by Livevol

Update 8-15-2014

Provided by Livevol

The stock closed just under $220 on expiration.

This is a stock price and volatility note on a social media stock that is fast becoming a "must have" in all sales departments (unlike other social media which is a marketing department function).

The risk in the stock price as reflected by the option market is near an annual low and is significantly lower than the actual realized risk (price movement) in the stock.

  • $26B market cap firm
  • $534M in revenue last quarter
  • $1.8B in revenue in the last four quarters

LNKD is different than the other 'Social Media' firms -- it's a sales tool... not a marketing / advertising platform.
  • This is where sales managers and sales people find contact information for prospects.
  • This is where job seekers find job providers.
  • This is where job providers find job seekers.
It's innovating (and acquiring).

Let's start with the 2-year stock chart.

Provided by Charles Schwab optionsXpress

Over the last two-years LNKD has moved up 103%; so basically a double.  But, as the chart above illustrates, the price has really fallen into one of three-cycles, each of which was fairly prolonged.

  • Cycle #1: Stock +145% in about a year (ending 9-1-2013).
  • Cycle #2: Stock  -45% in about eight months (ending 5-7-2014).
  • Cycle #3: Stock +50% in about three months (as of today: 8-11-2014).

As these prolonged periods of momentum have persisted, the risk in LNKD as reflected by the option market done its own dance.

Let's turn to the IV30™ chart in isolation, below.

Provided by Livevol

The implied volatility is the forward looking risk in the equity price as reflected by the option market (IV30™ looks forward exactly 30 calendar days).

In English, the red curve is the risk in future stock price movement.  We can see where risk is right now (far right), and how that level looks relative to both the annual low and two-year low.

The blue "E" icons represent earnings dates.  Risk always rises into those dates because that's a single event with a lot of unknowns (aka risk).

The yellow arrows I drew on top simply follow the peak risk into earnings. We see a rather obvious dip in risk for the most recent earnings report on 7-31-2014 (after market close).

Last Earnings

  • The stock closed at $180.64.
  • The next day the stock closed at $201.78.
  • Original Post: As of right now, the stock is trading $212.78.
  • Update 8-14-2014:  The stock is trading $218.48.

In a pre-earnings note, I demonstrated that the option market reflected a price range of [$162, $198] by the end of trading on Aug 15th.  A quick snapshot of the Options Tab on the close of 7-31-2014 is included below.

Provided by Livevol

That straddle costed ~$18.  Today it's worth ~$33 in parity.  So, to say it mildly, the option market vastly under-priced risk in earnings (so that dip in the red chart above was in fact an "incorrect" assessment of reduced risk.

LNKD is now:
  • $26B market cap firm
  • $534M in revenue last quarter
  • $1.8B in revenue in the last four quarters

The firm is also innovating (and acquiring) with a panned $1B business out of its "marketing solutions product" in conjunction with the planned acquisition of Bizo.

LNKD has turned into a sales tool.
  • This is where sales mangers and sales people find contact information for prospects.
  • This is where job seekers find job providers.
  • This is where job providers find job seekers.

Leaving FB out of the mix, which is now much more than "that app where  like my friends pictures" (Story: FB - Transformation: This Isn't Social Media, this is a Giant of Technology), this social media company is really... different.

I'm not bullish or bearish, I'm just trying to to point out that "social media" will soon be (already is) too broad an umbrella to categorize these firms.

Finally, the Options Tab is included below.

Provided by Livevol

Using the at-the-money (ATM) straddle we can see that the option market reflects a price range of [$195, $235] by the end of trading on Sep 20th.

  • If you believe the stock will be outside that range on expiry or any date before then, then you think the volatility is too low.
  • If you believe that range is too wide, and that the stock will definitively be in that range on expiration, then you think volatility is too high.
  • If you're not sure, and can make an argument for either case, then you think volatility is priced just about right.

This is trade analysis, not a recommendation.

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