LinkedIn (LNKD) is dead money in the eyes of some investors, having topped out at around $250 in 2013 and never managing to push much higher, save for a brief spell in early 2015.
But right now, LNKD stock trades for just under $200 — more than twice its opening price of $83 and almost five times the offer price of just $45 at the time of the 2011 LinkedIn IPO. That’s no small chunk of change for early investors who bought into this tech stock about a year before social media darling Facebook (FB) also hit the markets.
But you can’t eat back-tested returns, so unless you were one of the lucky few who bought LinkedIn in 2011, or during the early stages of the run-up in 2012, you’re likely pretty disappointed with your profits in LNKD.
So should you keep holding, or is LinkedIn stock a lost cause as it approaches another crucial earnings report?
LinkedIn Earnings Could Get Ugly, Again
If past is precedent, LNKD stock investors should be quite nervous about the upcoming Q3 earnings report from the tech company. After all, back in April, ugly LinkedIn earnings — or more specifically, poor guidance — gutted shares, resulting in a 20% crash in short order.
Unlike some young tech stocks, including fellow battered social media company Twitter (TWTR), profits are not a problem at LinkedIn. The company continues to post decent EPS growth, including a projected 13% increase in earnings this year and a whopping 55% expected growth for FY2016.
No, the challenge was disappointing revenue outlook. In the go-go growth environment of Silicon Valley, the end of growth often means the end of investor optimism and a rough landing for stocks. Given the fact that LinkedIn still boasts a forward P/E of about 55 even after its 2015 declines, there’s not a lot of room for error.
Investors were more optimistic going into July earnings, with the stock running up from under $200 to over $230. But, news of a 30% dip in ad sales caused LinkedIn stock to give it all back and fall to a new 52-week low of just $165 in August.
Fast-forward to today and we are back up around $200 and investors may be feeling a bit more swagger now that some of this bad news is theoretically priced in. But as recent history shows, thinking that LinkedIn is “due” for a strong rally after earnings is a dangerous game.
When LNKD stock reports earnings in a few weeks, it could simply be more of the same pain for shareholders.
LNKD Stock Faces Long-Term Risks
Beyond the very timely concerns about earnings, there are serious strategic risks to LinkedIn stock.
Over the years, one of the big attractions of LinkedIn has been a clear business model, with networking potential and job ads making the service a logical resource for businesses. A subscription model to generate revenue from LNKD users, in addition to making money off advertising, also helped push the company into profitable territory while other start-ups struggled to break even.
But LinkedIn is old news, now. Many users consider the website hard to use with a confusing interface, according to a recent survey from the American Customer Satisfaction Index, and the service is the least-favored among all social media services including Facebook, Twitter, and Google+ from Alphabet (GOOG, GOOGL). That’s not a good sign.
Among the biggest complaints from respondents: unwanted connection requests and spammy messages, the bane of all Internet use.
We’ve already seen Twitter suffer a rather brutal decline thanks to the fact that revenue growth and user growth has stalled, and LinkedIn needs to be quite serious in its response to these concerns if it wants to turn around long-term. The last thing a social media company can afford is being labeled spammy, clunky, and obsolete, and LNKD is dangerously close to adjectives like that, based on this survey.
In other words, the short-term risks of earnings are very real and the long-term risks of a jaded user base loom large. That should give LinkedIn stock investors pause, and make them seriously reconsider their positions right now.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at editor@investorplace.com or follow him on Twitter via @JeffReevesIP.
