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LinkedIn And Future Growth

09/13/12 12:09:52 PM
by Billy Williams

LinkedIn sputtered at the opening of its IPO but, now, is building up to take off higher and, possibly, take the market with it.

Security:   LNKD
Position:   Buy

LinkedIn (LNKD) is one of the prominent social media companies that have been the latest rage among the darlings of the Web 2.0 trend in the last few years. The company has taken a unique social networking approach to the corporate world by allowing individuals and companies to profile their set of skills/attributes and network in their respective industries. In the beginning, LNKD was ignored for its lack of monetization by analysts and investors alike, but now, it has made impressive strides since its initial public offering (IPO) in May to grow its revenue, earning it the attention from Wall Street and savvy investors.

For traders, the rising growth of LNKD coupled with its strong fundamentals and technical criteria have earned it a place on your watchlist of potential long candidates. See Figure 1.

FIGURE 1: LNKD. LNKD fell at its IPO debut in May and faltered at an obvious resistance point but has now reached the tipping point and is trading higher.
Graphic provided by:
LNKD has managed to grow its revenue over a three-year period to an impressive 217% through a combination of selling advertising, premium subscription services, and charging recruiters for helping find quality prospects for employment. Third-quarter sales revenue comes in at 89%, which is less than previous quarters but still very strong.

Second-quarter earnings comes in at 45%, which again is lower than previous quarters but well above the 25% minimum that you want to see in a growth stock. Analysts have revised earning projections for LNKD for 2012 at 77%. For 2013, expect earnings growth to come in at 110%, returning LNKD to triple-digit growth.

FIGURE 2: LNKD. Signaling a buy point at $113.20, the stock will likely offer more entry opportunities if you remain alert.
Graphic provided by:
In addition, LNKD boasts no debt, with the highest "Investor's Business Daily" (IBD) composite rating at 99 and fund ownership of 47% of its existing shares. From first quarter to second, fund ownership has increased more than 20%, from 415 funds to 551 funds now taking a stake in LNKD. This is reflected in the B+ rating for accumulation that LNKD has from the IBD rating service, revealing that many institutional investors are adding to their existing position of LNKD shares or taking an initial investment as the stock continues to rise on the back of quality earnings and sales growth.

While the stock floundered after its initial IPO in May, the fact that it has struggled to trend upward under the weight of a sideways market as well as the lack of initial interest in the beginning offers a couple of lessons for the trader. First, IPO offerings from a risk standpoint are a low-value trade setup and should be avoided for the very reason that IPOs often fail to live up to the expectation of its investors. This was the case with LNKD that was launched with a lot of buzz but failed to live up to the hype of the investment bankers who were touting the stock as the next Apple, Inc.

Second, a stock must prove itself through compelling fundamental and technical criteria. In this case, the price action after the IPO should have failed to earn it a spot on any trader's stock watchlist. Now, the dynamics have changed and LNKD has formed a price base and, lately, a cup & handle pattern (Figure 2).

As the handle portion of the pattern formed, analysts from Jeffries and Co. upgraded LNKD and announced that they were looking for a price target of $142 when the stock was trading at $115. After the announcement, the stock traded up through the $113.20 buy point on heavy volume, signaling an entry. On the day of the breakout, volume came in at 98% above average and, on Thursday, volume swelled to 175% of its trade volume average. This shows that institutional investors are accumulating shares and will likely drive price higher.

If you missed the breakout, a second entry is possible within 5% of its initial thrust by the formation of a three-week tight pattern, a pullback to the 50-day simple moving average (SMA) or a flat-base pattern. Any trade setup within the $113.10 to $118.76 range is actionable as the price digests the current upward momentum.

That said, keep in mind that the best stocks usually give you multiple buying opportunities as they make their big runs, but you have to be patient and pick your shots.

Billy Williams

Billy Williams has been trading the markets for 27 years, specializing in momentum trading with stocks and options.

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