I’ve been very vocal about my strong belief in LinkedIn both as a business and as a long term stock. I’ve been extremely reluctant to buy it though because the valuation has been so extreme. No matter how good of a story it would become, the upside vs downside test would not make it attractive. After dropping for over 6 months, I did finally decide to take a position in my long & short stock picks on March 31st:
-Long LinkedIn (LNKD, Financial) & Short Pandora (P)
I knew that the trade was a bit risky because in many ways, LNKD could be considered a “falling knife”. But the upside potential on this trade seemed significant. Clearly, that trade has not worked out as it is now down 24% and I will be closing it this morning as a result. It’s not that I don’t believe in LNKD or in this trade (quite the opposite), but at some point, fighting a strong trend can kill you. Even including this trade, my long & short picks have done exceptionally well (+10,11% on average) this year so this seems like the perfect time to get out before things get much worse. Just look at this chart, it hurts for anyone that has been long for the past 6-8 months.
What’s Next?
While I am closing a losing trade, a smaller bet that I made, I am now closer to opening a longer term, more significant position. For that to happen, I’d need to understand part of what is happening to the stock though. Are fundamentals changing significantly? This is clearly a major source of concern:
LNKD Revenue (Quarterly YoY Growth) data by YCharts
Also, it’s important to note that LNKD is not the only web related stock that’s getting killed. It’s a wave that’s taking down many players and is pushing others (BOX, SQUARE) to push back their IPO. To be honest, I think that trend certainly could continue. Many tech stocks have significant downside risk at this point.
Longer Term Picture
I personally continue to believe in LNKD’s future. Why?
-Very little competition in its space (professional social network)
-Diversified revenues (subscriptions, advertising, corporations and individuals, etc)
-Poised to do well in places like China
-Great leadership
I also personally think that some concerns are overblown. For example, it would make no sense to expect LinkedIn to compete with Facebook for things like #users, time spent, etc. Why? It’s a completely different customer base and those busier individuals simply do not spend as much time “surfing”, “chatting”, etc.
Ready To Pull The Trigger?
I’m not quite there yet to be honest as I think the valuation doesn’t scream bargain (although it’s getting closer to that point), but it is now on my radar (with stocks like TRIP) as potential long term speculative picks. And no, I will not personally feel like I need to hit the bottom here. If the valuation makes it a no-brainer, I’ll pull the trigger even though I might not catch its bottom. That is what I did with both Facebook (FB, Financial) and Apple (AAPL, Financial) in the past 2 years.
Disclaimer: Long LinkedIn (LNKD, Financial) which will be closed on today’s opening
