LinkedIn Is Now A Strong Buy: An Algorithmic Analysis
Source: I Know First Research

LinkedIn Corp. (LNKD) operates a social networking website that is focused on professional networking. The company released its most recent earnings report on April 30th, where forward guidance severely disappointed investors. The stock price fell significantly the next day, as it was the first time that the company’s earnings had disappointed investors in the four years it has been traded publicly. While the stock price was valued extremely high before the earnings report, the resulting sell-off has been overblown, and the company’s long-term outlook remains strong and intact. Therefore, the current dip in the stock price represents a great opportunity to buy into this position.

Short-Term Transitory Impacts

The guidance for the second quarter is what harmed the company’s stock price, as its 35% revenue growth for the first quarter year-over-year was in line with the market’s expectations. For the upcoming quarter, the company projected revenue growth of only 26%, which would be its worst growth performance ever. With a lofty valuation of about 73 times forward earnings, the lowered guidance caused the stock price to drop, falling 20% overnight.



This offers a great chance for investors to buy this stock, as the reaction to the lowered guidance has been well overblown. The factors that led to the lowered guidance are all either temporary or unrelated to the company’s long-term outlook, such as a large effect from currency headwinds. All American companies have been facing these effects in the face of the rising dollar. Other factors impacting the lowered revenue growth are not permanent, and will not have an impact on the long-term outlook of the company.

One of these factors is a larger than normal sales rep transition. Compared to last year, the amount of account transitions increased 50%, which was planned to improve the long-term health of the company. According to LinkedIn CEO Jeff Weiner, the company has been resegmenting the customer base during the past couple of quarters in order to drive deeper relationships with its customers, and the impact from this large initiative was underestimated. However, the impact should correct itself over the second half of the year, when LinkedIn will be better positioned.

One sign that the company’s revenue should correct itself during the second half of the year is the company’s full-year revenue guidance. With the large decrease in projected revenue growth for the second quarter, a large decrease in projected yearly revenue would make sense. However, this projection was only cut by 1.4%, indicating that LinkedIn believes its revenue growth will get back on track for the third and fourth quarters. The pending acquisition of Lynda.com has a large part to do with why the company’s second half performance will improve, and separately why the company continues to be bullish in the long term.

Lynda.com Impact

Much of the short-term, transitory impacts that I mentioned earlier come from the acquisition of Lynda.com, a website that specializes on online learning. The cost of the acquisition was $1.5 billion, the largest acquisition LinkedIn has made by far since the company went public. The deal, expected to close towards the end of the second quarter, played a large part in the lower revenue guidance for the coming quarter, as the revenue that it will contribute will not come in the next quarter.



This acquisition will also help the company attract more users and, more importantly, get those users to visit the web site more often. Much was made of the fact that LinkedIn did not provide specific amount of users during the most recent quarter. But they did mention that unique visiting numbers grew 18% to an average of 97 million per month and that member page views grew 30%. Mobile views also grew rapidly during the most recent quarter.

The company’s acquisition of Lynda.com will help get users to visit the website more often and will work well with its current website, where users come to network and look for jobs. The addition of online courses will give users another reason to visit the website while keeping with its current focus on social networking for the workplace. Courses can be shared with potential employees, and employers will be able to see which courses potential employees have taken.

With the remarkable revenue growth set to return during the second half of the year, along with improved user growth and visit growth because of its newest acquisition, LinkedIn is a strong play in the social networking space. Continued expansion into other markets, including an emphasis on China where the company has a team in place to build local talent after acquiring a license in the market, also offer plenty of room for continued revenue growth.

Algorithmic Analysis

Using an algorithmic analysis can confirm or contradict the company’s strong fundamental analysis. I Know First supplies financial services, mainly through stock forecasts via their predictive algorithm. The algorithm incorporates a 15-year database, and utilizes it to predict the flow of money across 2000 markets. The algorithm has more data to forecast within the long term and, naturally, outputs a more accurate predication in that time frame. Having said that, intraday traders, along with short-term players, will also benefit by taking the algorithmic perspective into consideration.

The self-learning algorithm uses artificial intelligence, predictive models based on artificial neural networks, and genetic algorithms to predict money movements within various markets.

The algorithm produces a forecast with a signal and a predictability indicator. The signal is the number in the middle of the box. The predictability is the number at the bottom of the box. At the top, a specific asset is identified. This format is consistent across all predictions. The middle number is indicative of strength and direction, not a price target. The bottom number, the predictability, signifies a confidence level.

The above figure includes the 1-month and 3-month forecasts for LinkedIn. The forecasts are both very bullish, with the company being the top stock pick according to the algorithm. The algorithmic analysis is in agreement with the bullish fundamental forecast for the company, indicating that the stock price is currently undervalued. This makes sense taking into account the recent fall of the stock price, offering an opportunity for investors to buy the stock ahead of it returning to its previous levels and growing in the future.

This article originally appeared on iknowfirst.com