Speculator’s Corner: How To Trade LinkedIn (LNKD)

| August 12, 2013 | 0 Comments

If you read or watch financial news, you’re probably hearing plenty about Facebook (FB).  After all, it’s the largest social network in the world and has something like 1 billion users.  And the stock is finally trading above its IPO price.

But, there’s another online community doing extremely well – and it doesn’t get nearly the press Facebook gets.

I’m talking about LinkedIn (LNKD), the world’s largest online professional network.  It’s basically Facebook for the business world.

As a public company, LNKD has essentially seen nothing but success.  The shares are up 105% in 2013 to $235 per share.  That’s over 5 times the 2011 IPO price of $45!

However, many investors fear the stock’s lofty valuation.  At the current price, we’re talking about a P/E ratio of 673x. The shares are even trading at 112x projected earnings!

So does that mean the stock is overvalued?  Not necessarily.

You see, LNKD is too young for it to be focused on profits.  Right now, revenue growth is key.  And judging by last week’s results, the company is doing just fine in that regard.

Second quarter revenues came in at $364 million, an impressive 59% increase over the prior year’s period.  The gains were sparked by a 37% increase in membership.  Members now total 238 million worldwide.

Here’s the thing…

LNKD’s business model is starting to gain traction.  The company doesn’t rely on the ultra-competitive advertising space (like Facebook) to generate a majority of its revenue.

The primary source of revenue comes from the company’s Talent Solutions.  It includes premium services used by recruiters and job seekers.  What’s more, LNKD’s becoming a major content source as a business news hub.  And, the company’s mobile usage has shot up in recent months.

Finally, LNKD issued optimistic revenue guidance for the rest of the year.  Management expects the solid growth to continue.  In other words, the company may just be able to justify its high price for the time being.

So what’s the best way to trade LNKD?

One way to take advantage of the current situation in LNKD using options is to buy a strangle.  That is, buy an out of the money call and an out of the money put at the same time.  The strangle functions like a straddle but it’s cheaper, and is especially useful for an expensive stock like LNKD (where straddle prices can be exorbitant).

Essentially, you’re betting the stock is going to keep moving – one way or the other. 

On one hand, the stock is trading at a sky-high valuation.  Short sellers tend to be attracted to stocks like that.  On the other hand, the company’s quarterly report was fantastic.  There are plenty of reasons for the stock to continue its run. 

I believe the stock still has room to run, but there is some downside risk.  By using a strangle, you’ll be able to make money regardless of what direction wins out in the short-term.

Yours in Profit,

Gordon Lewis

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Category: Options Trading

About the Author ()

Gordon Lewis is the Chief Investment Strategist and editor for the popular daily newsletter – Options Trading Research. He’s also one of the key analysts behind the highly successful Options Trading Wire and Advanced Options Adviser. As a market maker on the floor of the CBOE, Gordon analyzed and traded stocks and options across a broad range of market caps and industries including retail, internet, oil, insurance, and telecom. He often traded thousands of options contracts per month… and it’s fair to say, Gordon’s analyzed and invested in some of the most complex and successful options strategies in the world.

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