Here's Why LinkedIn Will Crush Wall Street's Profit Forecast

Feb. 5.14 | About: LinkedIn (LNKD)

LinkedIn Corp. (NYSE:LNKD) is set to report FQ4 2013 earnings after the market closes on Thursday, February 6th. LinkedIn is the leading online social web platform for professional networking. Last week the world's largest social network, Facebook (NASDAQ:FB), demonstrated once again that social media companies can monetize at a much faster rate than Wall Street has been predicting. One area where Facebook showed particular strength is in targeted mobile advertisements, which have been an area of focus for LinkedIn. In addition to more effective ad sales, analysts are also expecting growth in Linked In's Premium Subscriptions and Talent Solutions businesses. In total Wall Street is only expecting about 6% profit growth and 45% revenue growth compared to last year. Investors have similar revenue expectations compared to Wall Street, however, they have far more confidence in LinkedIn's ability to increase profit. If you look at the chart of LinkedIn's EPS vs the Wall Street consensus, it's pretty clear why they may have good reason to believe LNKD will beat the Street's projection.

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The information below is derived from data submitted to the Estimize.com platform by a set of Buy Side and Independent analyst contributors. image

(Click Here to see All Estimates for LinkedIn)

The current Wall Street consensus expectation is for LinkedIn to report 37c EPS and $438.86M revenue while, the current Estimize.com consensus from 45 Buy Side and Independent contributing analysts is 42c EPS and $439.67M revenue. This quarter the buy-side as represented by the Estimize.com community is expecting LinkedIn to beat the Wall Street consensus by a wide margin on profit and a small differential on revenue.

Over the previous 6 quarters the consesus from Estimize.com has been more accurate than Wall Street in forecasting LinkedIn's revenue every quarter and has been more accurate in predicting EPS 5 times. By tapping into a wider range of contributors including hedge-fund analysts, asset managers, independent research shops, students, and non professional investors Estimize has created a data set that is up to 69.5% more accurate than Wall Street, but more importantly it does a better job of representing the market's actual expectations. It has been confirmed by an independent academic study from Rice University that stock prices tend to react with a more strongly associated degree to the expectation benchmark from Estimize than from the Wall Street consensus.

The magnitude of the difference between the Wall Street and Estimize consensus numbers often identifies opportunities to take advantage of expectations that may not have been priced into the market. In this case we are seeing a smaller differential compared to recent quarters, although the EPS differential is still formidable.image

The distribution of estimates published by analysts on the Estimize.com platform range from 37c to 46c EPS and $415.68M to $450.18M in revenues. This quarter we're seeing a moderate distribution of estimates compared to other quarters.

The size of the distribution of estimates relative to previous quarters often signals whether or not the market is confident that it has priced in the expected earnings already. A greater distribution of estimates signaling less agreement in the market, which could mean more volatility post earnings.image

Throughout the quarter the EPS estimate from Wall Street decreased from 40c to 37c and the Estimize community reduced its consensus from 44c to 42c. Wall Street inched up its revenue consensus from $438.46M to $438.86M while the Estimize forecast increased sharply from $436.74M to $439.67M. Timeliness is correlated with accuracy and rising analyst expectations at the end of the quarter are often a bullish indicator.image

The analyst with the highest estimate confidence rating this quarter is anmikyoso who projects 44c EPS and $440.39M in revenue. In the Winter 2014 season anmikyoso rated as the 29th best analyst and is also ranked 29th overall among over 3,750 contributing analysts. Estimate confidence ratings are calculated through algorithms developed by deep quantitative research which looks at correlations between analyst track records and tendencies as they relate to future accuracy. In this case anmikyoso is making a bullish call expecting LinkedIn to outperform the Estimize consensus on both the top and bottom line.

This quarter investors have very high expectations from Linked In compared to Wall Street. While the revenue expectations are similar Wall Street is only calling for 37c EPS while contributors on the Estimize.com platform are forecasting 42c EPS. Although LinkedIn's has demonstrated the ability to monetize much faster than Wall Street has predicted, they will still need to have a great quarter to meet the lofty profit expectations from the buy side.