LNKD Stock: The No. 1 Reason to Be Bullish on LinkedIn Stock

LNKD Stock$10.0 billion! That’s how much LinkedIn Corp’s (NYSE:LNKD) market cap evaporated in one trading session. No doubt, LNKD stock investors have been hit hard. But remember that it’s in these extreme market conditions that value starts to appear.

Here’s why you shouldn’t ditch the company just yet.

LNKD Stock Extremely Oversold

It’s no surprise that with the huge crash in LinkedIn stock after earnings, many short sellers started jumping in. One indicator is saying that the stock has entered an extremely oversold territory.

I’m looking at the relative strength index (RSI), which is based on the closing prices of a recent trading period and compares the magnitude of recent gains to recent losses to try to determine whether the stock is overbought or oversold.

The RSI ranges from zero to 100. A stock is considered to be overbought once the RSI approaches 70 and oversold if the RSI approaches 30. Right now, the 14-day RSI for LNKD stock is hovering just above 30, indicating that LNKD stock is extremely oversold.

The RSI can’t stay on the floor forever, though. There might be a technical bounce in LinkedIn stock soon.

Note that LNKD stock got punished not because of its earnings, but because of its guidance. In fact, the company’s earnings were more than solid.

In the most recent quarter, LinkedIn increased its revenue by 34% year-over-year to $862 million, which also beat Wall Street’s expectation of $858 million. Its bottom line turned out to be even better. The company reported adjusted earnings of $0.94 per share, a 54% increase year-over-year and absolutely smashed analyst’s earnings-per-share (EPS) estimate of $0.78. (Source: “LinkedIn Announces Fourth Quarter and Full Year 2015 Results,” LinkedIn Corp, February 4, 2016.)

Now, onto the guidance. Wall Street expects revenue to be $867 million in the first quarter of 2016, with adjusted earnings of $0.74 per share. What was LinkedIn’s actual guidance? $820 million in revenue and $0.55 in adjusted EPS.

The Bottom Line on LNKD Stock

Investors know that past achievements don’t guarantee future success. But a lowered guidance is not really the end of the world. With the bar set lower, LinkedIn has a better chance of outperforming its guidance.

As LinkedIn lowered its guidance, analysts are also revising their estimates as well. The average EPS estimate for Q1 2016 was $0.74 a month ago. Today, it stood at $0.60. This also improves the chance of an earnings beat. And speaking of earnings beats, keep in mind that in 2015, the company beat analyst’s EPS estimates in all four quarters.

After such a huge haircut to its share price, the negative sentiment could create an overhang for LNKD stock. But if investors find out that the market might have overreacted, LinkedIn stock could start rising again.