Category Archives: LNKD

Dow Theory: Did Microsoft Overpay for LinkedIn?

The question has come up about whether or not Microsoft (MSFT) has overpaid for LinkedIn (LNKD).  We’re going to apply Dow Theory to determine what would have been considered the fair value for LNKD based on the stock price. Next, we're going to see how much or how little MSFT paid for LNKD.

First, we need to establish what Dow Theory considers the fair value.  According to S.A. Nelson, fair value is determined when…

"...stocks have recovered after artificial depression and relapsed after artificial advances to the middle point which represented value as it was understood by those who bought or held as investors."

The idea of “…bought or held as investors…” is very important as it reflects individual (or institutional) money that has decided to buy a stock with the expectation of holding for an extended period of time, usually 5 years or more.

Artificial Advance and Depression

When looking at the price movement of LinkedIn, it is easy to identify the artificial advances and depressions.  However, to determine the fair value, a price which long-term holders of the stock have, on average, acquired the stock, we look to the middle point.

In order to determine the middle point (fair value), based on Dow Theory, we look at the previous major advance from the low to the high in the stock price.  The previous low was $59.07 and the previous high was $276.18.  The middle point (also know as the 50% principle) is $167.63.

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LinkedIn Fair Value

If fair value for LinkedIn was actually $167.63 and Microsoft agrees to pay $196 per share, that would suggest a premium of 16.92%.  How does this crude methodology stack up against institutional analyst assessments of fair value for LNKD?  This from Morningstar.com:

“LinkedIn posted a better-than-expected start to 2016 as the firm beat both consensus estimates and management guidance for revenue and EBITDA, with strong performance across all three segments. We reaffirm the company's wide moat rating and our fair value estimate of $155. With shares trading just inside three-star territory in after-market trading, we would wait for a larger margin of safety before investing (source: Macker, Neil. “LinkedIn Starts 2016 By Beating Expectations, Management Remains Focused on Engagement”. Morningstar.com. 4/29/2016. accessed 6/14/2016.).”

Morningstar had $155 while Dow Theory assessed a $167.63 fair value.  Although the Dow Theory method seems arbitrary, it is based in sound reasoning which we have covered before on the topic of the 50% Principle.

So, the question becomes not “did Microsoft overpay for LinkedIn?” instead it should be viewed by “how much did Microsoft overpay for LinkedIn?”.  Based on Dow Theory, Microsoft didn’t pay much more than the company would have been worth to long term holders of the stock, in this case a premium of only 16.92%.

LinkedIn: Decline and Rebound Foretold in SRL

On June 13, 2016, Microsoft announced that it was going to acquire LinkedIn Inc. (LKND) for approximately $26 billion.

Based on our prior work, LinkedIn Inc. (LKND) has helped to make Edson Gould’s Speed Resistance Lines (SRL) one of the most interesting indicators to watch when it comes to a stock that has established a declining trend.  On April 30, 2015, we said the following of LinkedIn:

“In the prior decline, LNKD fell to slightly below the midpoint target at $133.19.  This suggests that the current slump should go below the conservative downside target of $187.68.  Going below the $187.68 level should get the stock price to the ascending midpoint target of $139.87.  Those interested in LNKD should consider the stock in stages at or below the ascending $139 level with an acceptance of a decline to the ascending $92.06 level.”

LNKD did decline below $187.68.  However, rather than decline to the $139 level as anticipated, the stock price declined directly to the ascending $92.06 level.  At the time, for anyone serious about investing in LNKD, the dramatic after-hours decline from above $187 to below the $139 level indicated that LNKD was an open target for consideration.

Below is LinkedIn’s stock price based on Edson Gould’s Speed Resistance Lines.

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Now that Microsoft (MSFT) has decided to absorb LinkedIn, we believe this SRL has served our analysis purposes well.  We continue to maintain that Gould’s SRL, when applied to the appropriate stock, has delivered the most fascinating results.

Review: LinkedIn Corp.

On April 30, 2015, we presented downside targets for LinkedIn Corp. (LNKD) when the stock was trading at $199.  In our concluding commentary we said the following:

“Those interested in LNKD should consider the stock in stages at or below the ascending $139 level with an acceptance of a decline to the ascending $92.06 level.”

Between the closing price of $192 on February 4, 2016 and the opening of February 5, 2016, LinkedIn Corp. had declined nearly –30% in after-hours trading.  The opening price on February 5th was at $125.  Below is an updated price chart applying Edson Gould’s Speed Resistance Lines.

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As indicated nearly one year ago, at nearly double the price, the extreme downside target of $92.06 was a distinct possibility.  Additionally, anyone willing to take the risk at $139 or below has had favorable prices from which to choose. What should be noticed is the fact that LNKD managed to hit the extreme downside target and then bounce above it, for the time being. 

There is incredible pressure for this company to be turned around or absorbed.  It is with luck that the stock has managed to bounce at the level we outlined.  However, further marginal failures by the company could result in a retest of the $59.07 price.

LinkedIn Corp. Downside Targets

On April 30, 2015, in after-hours trading, LinkedIn (LNKD) declined –20.95% from the closing price of $252.13 to $199.30.  with such a decline, it is worth considering what the downside risk would be according to Edson Gould’s Speed Resistance Lines (SRL).

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The above chart shows the current SRL downside targets based on the peak price of $276.16:

  • $187.68 (conservative target)
  • $139.87 (midpoint target)
  • $92.06 (extreme target)

What is most relevant in this SRL is the downside targets from the previous peak at $256.14.  At that time, LNKD had the following downside targets:

  • $181.00 (conservative target)
  • $133.19 (midpoint target)
  • $85.38 (extreme target)

In the prior decline, LNKD fell to slightly below the midpoint target at $133.19.  This suggests that the current slump should go below the conservative downside target of $187.68.  Going below the $187.68 level should get the stock price to the ascending midpoint target of $139.87.  Those interested in LNKD should consider the stock in stages at or below the ascending $139 level with an acceptance of a decline to the ascending $92.06 level.

Worth noting is that anyone who had a standing stop loss order with their broker, say below $250 or $240, will be forced out of their position once the stock market opens on May 1, 2015 at whatever the opening price is as long as it is below either of the sample levels.  At $199, investors with stop loss orders will take a severe beating even though they may not have been involved in the after hour activity.