The Motley Fool: LinkedIn’s recent problems could be good for long-term investors
LinkedIn (NYSE: LNKD) is the world’s largest professional social network, with more than 430 million members in 200 countries and territories. Shares have fallen about 50 percent from their 52-week high, in part due to a weak earnings report and outlook several months ago. But the company’s latest earnings report is heartening, and investors willing to wait for years may be well rewarded.
LinkedIn’s last quarter featured revenue up 35 percent year over year, with membership growing by 19 percent and member page views surging by 34 percent. Recruiters are increasingly using LinkedIn, and management notes, “increased member engagement with jobs is already delivering a stronger pipeline of potential candidates to our existing customers.” Members are welcoming the newly redesigned mobile app as well, which was launched late last year.
The market for online professional services is set to grow briskly, and LinkedIn has positioned itself ideally as the go-to resource within this space. The company’s executive team estimates that its overall market potential is $115 billion, well north of the $3 billion LinkedIn generated in fiscal 2015.
LinkedIn’s annual average growth rate over the next five years is estimated to be around 27 percent, suggesting that it may be reasonably to attractively priced for long-term investors who can handle a bumpy ride. (The Motley Fool owns shares of and has recommended LinkedIn.)
Ask the Fool
Q: What’s a stock option’s “strike price”? - H.W., Norwalk, Connecticut
A: It’s the price at which it can be exercised. Imagine you work for Farm Dogs Inc. (ticker: BINGO). You’re issued 1,000 stock options with a strike price of $10 each. A few years later, the company’s stock is trading at $25. At this point, you decide to “exercise” your options.
Since your options carry a strike price of $10, you’re entitled to buy up to 1,000 shares at $10 each — not the $25 that they’re going for on the open market. If you exercise all of them, you’ll fork over $10,000 to your company for 1,000 shares worth $25,000. You can hang on to them as long as you like, or quickly cash out for a $15,000 profit.
As you might suspect, though, it’s not exactly quite this simple. There are many tax issues to consider, and your company’s option plan might have some special features. Read the plan carefully, and consider seeking professional financial advice. You might also read “Consider Your Options: Get the Most From Your Equity Compensation” by Kaye Thomas (Fairmark Press, $24).
Q: Which stock should I sell? One that has lost value, one that’s stagnated for years or one that has gained in value? - E.B., Ann Arbor, Michigan
A: Ignore how the stocks have done in the past. Each company’s future is what matters most. Try this exercise: Rank your holdings by how much confidence you have in their health and growth prospects, and consider selling the ones in which you have the least faith. Your money should always be concentrated on your best ideas, the ones you think are likely to grow the most.
My dumbest investment
My dumbest investment? I took a financial class in college, looked at the Krispy Kreme Doughnuts Corp., and then invested $5,000 in it. I didn’t think twice about its rapid expansion plans or how it was diversifying by buying a bread company. I watched my shares go from around $40 per share to below $5. I should have diversified better, myself. – C.D., online
The Fool responds: It has been a volatile ride indeed for Krispy Kreme investors. Those who invested early, when the company that was founded in 1937 went public in 2000, have seen their investment average just a few percent gain annually over 16 years, while those who picked up shares five years ago have enjoyed an average annual gain topping 25 percent.
It’s fair for a company to try to expand geographically, but Krispy Kreme faced stiff competition in the Northeast from Dunkin’ Donuts, and struggled. It has since expanded successfully, especially internationally – sporting more than 1,000 stores today in 26 countries. Its shares are being taken private, too, as the company is being acquired by German private equity company JAB Holdings (whose empire also includes Keurig Green Mountain, Caribou Coffee and Peet’s Coffee & Tea).
Krispy Kreme’s stock price has surged to close to $50 per share and plunged to nearly $1. You’re right that it’s smart to have a diversified portfolio, lest any single holding plunge and devastate it.