It’s been a horrific week for social media/Internet operators. Twitter Inc (NYSE:TWTR) plunged after an accidentally early earnings release revealed weak revenues, and Yelp Inc (NYSE:YELP) lost roughly 20% on its own earnings disappointment.
Now LinkedIn Corp (NYSE:LNKD) has joined the social failure parade, with shares off some 20% in Friday’s trading on its own bad news.
In this case, LNKD first-quarter results weren’t really the problem. LinkedIn earnings of 57 cents per share met expectations, and revenues of $638 million were up 35% year-over-year to top the Wall Street consensus.
No, the issue was LinkedIn’s very weak guidance. LNKD stock plummeted after the company said Q2 revenues would come in a range from $670 million to $675 million, producing earnings of 28 cents per share. That was a far cry from what Wall Street was thinking, which was 74 cents per share in profits on $719 million in revenues.
Also, LinkedIn reduced its full-year forecast for revenues of $2.9 billion, which it previously saw coming in a range of $2.93 billion to $2.95 billion.
Unlike Twitter and CEO Dick Costolo, LinkedIn and CEO Jeff Wiener have a solid track record with guidance, which makes this big miss quite a shock.
And an abrupt change in pace like this could mean there’s even more risk on the downside.
So, what’s ailing LinkedIn?
For one, the volatility in foreign exchange has taken a toll on LNKD, which derives roughly 40% of its revenues from outside the U.S.
And looking at the core business, there’s deterioration in display advertising, which is something that has impacted other Internet operators including Yahoo! Inc. (NASDAQ:YHOO). Advertisers have been moving toward more automated solutions that are tied to demographics and user behavior. LNKD noted that display advertising spending declined 10%, specifically pointing to issues in Europe.
Another issue was churn and lower upselling within the recruiting business, which is the main driver of the company. LNKD blamed this on major transitions within its sales teams. The company is downplaying this as a short-term issue, but that could be wishful thinking. The churn might ultimately point to issues with ROI or competitive pressures. Unfortunately, LNKD was vague on this front.
In fact, LinkedIn did not update its user numbers in this report, merely reporting “over 350 million” users, which is worrisome.
But one thing is clear: Overall growth is decelerating. And that’s problematic amid still froth valuations, such as a forward price-to-earnings ratio of 50 — just as expensive as Twitter, which has much more ambitious earnings growth estimates, and much more expensive than Facebook Inc (NASDAQ:FB), which trades at 30 times earnings and projecting 30% earnings growth, vs. 40% for LNKD.
In other words, LinkedIn is struggling, but it’s not priced like it’s struggling. So amid these emerging issues with display ads and recruiting, LNKD probably isn’t worth a rebound buy yet.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. As of this writing, Tom Taulli did not hold a position in any of the aforementioned securities. Follow him on Twitter at @ttaulli.
