With Twitter Inc. (NYSE:TWTR) laying an egg with its first-quarter earnings report, you might be tempted to bail on the social media sector for a while. Doing so, however, would cause you to miss out of a potential earnings opportunity with professional social media networking firm LinkedIn Corp. (NYSE:LNKD).
LinkedIn steps up to the earnings podium after the close of trading tomorrow night, and Wall Street is looking for sizable gains. Currently, the consensus is targeting first-quarter earnings of 56 cents per share, up 47% from 38 cents per share in the year-ago period. Revenue is seen rising 34.4% to $636 million.
LinkedIn’s sentiment backdrop shows that expectations are a bit on the high side. For example, data from Thomson/First Call indicates that 31 of the 41 analysts following LNKD stock rate the shares a “buy” or better, compared to nine “holds” and just one “sell” rating. The 12-month consensus price target of $300 per share is a little on the light side, representing a premium of about 12% to yesterday’s close, so there is some room for improvement should LinkedIn offer up a solid report.
Impressing the analyst community may be harder that it appears, though. EarningsWhisper.com reports that LinkedIn’s first-quarter whisper number arrives 4 cents higher than the consensus at 60 cents per share. With LinkedIn only topping the consensus in two of the past four quarters, a beat tomorrow night should not be considered a foregone conclusion.
Outside the brokerage bunch, things are not quite so rosy. Short sellers, for one, have placed some sizeable bets against LNKD stock, with 5.2 million shares currently sold short. This wealth of short interest accounts for nearly 5% of LNKD’s float, or shares available for public trading, and could be a potential driver in a short squeeze situation.
Additionally, if short sellers are nervous about LNKD’s post-earnings performance, it isn’t showing up in the stock’s call options activity. Currently, LNKD’s May put/call open interest ratio rests at a middling reading of 0.87, with puts and calls nearly in parity with each other.
Zeroing in on the soon-to-expire weekly May 1 series, this ratio dips only slightly to 0.69. If short sellers were expecting a post-earnings rally from LNKD, it is likely that these ratios, and thus open LNKD call open interest, would be considerably higher due to hedging activity.
Click to Enlarge Overall, weekly May 1 series implieds are pricing in a potential post-earnings move of about 7.9% from LNKD stock. This places the upper bound at $277.78, while the lower bound lies at $237.22. An earnings induced rally would have LNKD trading in all-time high territory, while a sell-off could see the shares testing support near their 200-day moving average before the end of next month due to follow-through selling pressure.
2 Trades for LNKD Stock
Call Spread: Since moving higher following its fourth-quarter report, LNKD stock has shown staying power amid turbulent market conditions. While a lack of a rally might give some of the bulls pause, there is still considerable potential for the company and the stock. As such, traders looking to side with the bulls in the brokerage community might want to consider a May $260/$270 bull call spread.
At last check, this spread was offered at $3.75, or $375 per pair of contracts. Breakeven lies at $263.75, while a maximum profit of $6.25, or $625 per pair of contracts, is possible if LNKD closes at or above $370 when May options expire.
Put Sell: On the other hand, if you are worried that LNKD is in for more sideways action, then a weekly May 1 series $230 put sell may be more in line with your expectations. At last check, this put was bid at $1.15, or $115 per contract. If LNKD closes at or above $230 by the close this Friday, traders entering this position will retain the premium received for opening the position. However, if LNKD trades below $230 ahead of expiration, then traders may be assigned 100 shares of LNKD stock, at a price of $230 per share, for every contract sold.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
