Is the LinkedIn Corp (LNKD) recovery going to continue into summer?
Don’t hold your breath.
Although LNKD stock has rebounded strongly from its 2016 lows, shares are still down some 40% year-to-date and trade nearly 50% below their 52-week highs.
And anyone hoping that LinkedIn shares appreciate considerably from here need to consider a number of hurdles standing in LNKD’s way.
The Bear Case for LNKD Stock
Yes, the valuation on LinkedIn stock has come down considerably since the start of the year, but so have LinkedIn’s growth projections, as well as the results from its recent first-quarter earnings report.
LNKD also has issues in the shorter-term, because even though the stock has been recovering from its February plunge, its chart still looks broken.
When a momentum stock disappoints on the growth front, it gets crushed. On the chart, you can see the gap that LNKD stock created when it gave its gloomy guidance back in February. And although LinkedIn shares have bounced off the support line at around $100 per share, the stock still has a long way to go before making investors whole. Albeit, it’s a good thing that LNKD stock has just reclaimed its 100-day average at $133.
While LNKD is back on the rise, the stock is getting close to registering overbought levels in its Relative Strength Index (RSI) reading, just as it comes up against price resistance at $136. If it does surpass $136 and that line becomes support, $157 will become the next target — but I think LinkedIn’s fundamentals must drastically improve for the stock to keep pushing to that level.
LinkedIn did manage to beat Street projections for both revenues and earnings per share in its first quarter, but that’s in part because the professional social network company took down expectations sharply when it reported Q4 earnings back in February, causing the massive decline in the first place.
And while the market cheered a “less bad” quarter, many overlooked the issue plaguing LNKD stock: Rising costs.
As been the case for the past several quarters, LinkedIn’s costs shot up 42% YOY during the quarter to $926.9 million, outgrowing every other important metric, including revenue (42% vs. 35%). At the same time, the adjusted EPS of 74 cents marked only a 5% rise year-over-year.
And the fact that the management under-projected for this current quarter’s EPS (guidance of 55 cents vs. actual of 74 cents) doesn’t instill confidence they have a good grasp of this company.
Complicating matters, shares aren’t cheap. LinkedIn stock is now priced at about 40 times fiscal 2016 estimates of $3.46 per share. Not only is that valuation almost twice the multiple of the S&P 500, but LNKD stock is priced at seven points above Facebook Inc (FB). Not to mention, Facebook is projected to grow earnings at 56% this year, while LinkedIn is projected to grow at 21%.
On its own, 21% would be solid growth, but when compared to a best-of-breed like Facebook, one has to ask, where’s the value in LinkedIn?
As of this writing, Richard Saintvilus did not hold a position in any of the aforementioned securities.