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Why Datalink Corporation Stock Skyrocketed

By Alex Planes - Jul 25, 2014 at 12:20PM

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Is this meaningful or just another movement?

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Shares of Datalink (NASDAQ: DTLK) surged to a monstrous 27% gain at the opening bell this Friday, but have since settled into a pop of only 17% by early afternoon, after the company released its second-quarter earnings results.

So what: The data solutions specialist reported revenue of $159.4 million for the quarter, which was an 8% year-over-year improvement and well above Wall Street's expectation of $149.6 million. The company's adjusted earnings of $0.22 per share also blew past Wall Street's consensus estimate of $0.13. Looking ahead, Datalink expects to earn between $150 million and $160 million in revenue for the third quarter, which would result in EPS in the range of $0.16 to $0.22. Wall Street had projected $148.4 million on the top line and $0.16 on the bottom line, so Datalink appears prepared to put together another solid double beat for the quarter now in progress.

Now what: Datalink's shares have been prone to wild fluctuations with alarming regularity over the past year, crashing on bad earnings and skyrocketing on good earnings. Despite all that volatility, today's pop has returned the stock more or less to breakeven for the past 52 weeks -- but it's important to keep in mind that virtually all of this movement has been related to Datalink's valuation, which has marched (or rather leapt) in virtual lockstep with the company's share price. On the other hand, Datalink's price-to-free cash flow ratio was in the single digits before today's pop, which is a lot more reasonable than the headline P/E ratio. Based on this past year's volatility, I'd tread cautiously, as another big drop could be in the cards if Datalink's optimistic projections can't hold up for the third quarter. Don't ignore Datalink, but don't dive in without first digging deeper.

Alex Planes has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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