It has been about a month since LinkedIn Corp (LNKD) plunged more than 40% on its awful earnings report, with the company losing almost $14 billion in market cap. The impact was so strong that many other Internet and cloud stocks also fell hard. The worry for investors: Is the tech party over with?
Well, the good news is that the overall markets have rebounded nicely — and so has LinkedIn stock. It’s up nearly 20% from its low.
Yet this does not mean you should rush to buy LNKD. If anything, there could still be an opportunity for short sellers to make some money.
Let’s face it, the growth story appears to be petering out. For example, in 2014 LNKD posted an annual increase in revenues of 45% but the ramp dropped to 35% in 2015. Things would have been even more lackluster if the company did not shell out $1.5 billion for Lynda.com, which is a major provider of online education.
But the real deceleration is expected to happen in 2016. Based on LNKD guidance, the company forecasts a growth rate of a mere 20% to 22%.
Yet other social media operators are growing much faster. Just take a look at Facebook Inc (FB), which posted a hefty 44% spike in revenues in Q4. Hey, even the beleaguered Twitter Inc (TWTR) has continued to show strength on the top-line, with a jump of 48% during the same period.
Despite all this, it appears that LNKD management is somewhat clueless about the situation. Regarding the Q4 results, CFO Steve Sordello noted:
“I was pretty surprised at the magnitude. … We haven’t seen anything fundamentally change in the business with the exception of Bizo.”
Problems for LNKD
Well, the fact is that LNKD does face some major issues. First of all, the $175 million acquisition for Bizo acquisition was certainly a failure. Keep in mind that LNKD could not find a way to monetize the asset with its massive user base. As a result, the company shut down the Bizo unit.
No doubt, this should be an ominous sign for investors in LinkedIn stock. After all, M&A will likely be critical to help with the overall growth rate. Oh, and the company will need to focus on new markets, such as enterprise services. But this means competing against tough rivals like Salesforce.com, Inc. (CRM) Microsoft Corporation (MSFT) and even Oracle Corporation (ORCL).
Next, there is the nagging issue about the global economy, which has been slowing down lately. In such an environment, there will likely be less demand for hiring services, such as for LinkedIn’s “talent solutions” offering.
What’s more, there could be an adverse impact from the potential unwinding of the tech boom in Silicon Valley, which has seen more layoffs. While it’s unclear how much of the LNKD business comes from tech operators, it would not be surprising that such companies are avid users.
Something else: LNKD will have to deal with the emerging competition from Facebook, which has been working on its Facebook@Work effort. For the most part, the service allows workers to easily communicate with colleagues. Granted, it is still in the early stages, but FB is likely to get traction because of its massive 1.6 billion user base.
And finally, LinkedIn stock is still far from cheap, with the forward price-to-earnings ratio at 28X. This does seem kind of steep for a company that is expected to grow at only 20% or so. In fact, FB has a multiple of 25X and the company is growing much faster!
Bottom Line for LinkedIn Stock
Going forward, there are few catalysts to get things back on track for LNKD.
Furthermore, the slow global economic growth is likely to weigh on the company, and there is also the potential competitive impact from FB.
In other words, despite the recent rally, it seems like a good bet there is more downside here, which should be good news for the shorts.
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. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
