This week’s earning parade has seen its fair share of tumbles — especially in the tech sector. The market reacted negatively to numbers out of big-name tech stocks like Facebook (FB), Twitter (TWTR) and Yelp (YELP), with the last two getting especially pounded to the tune of double-digit one-day losses.
For that reason, I was quite cautious heading into yesterday’s LinkedIn (LNKD) earnings report — a stock that is part of my GameChanger Stocks portfolio. Well, a stock that was part of my portfolio.
I recommended readers sell LinkedIn stock prior to the report. The reasoning: While I believed the company would beat the low bar set for it, it looked like any good news had already been priced into the stock. In my mind, the risk/reward did not look favorable enough to hold the shares through earnings.
LNKD Was Already Overbought
As I told my readers, LNKD stock was selling at a generous multiple of 70 times next year’s EPS estimates as of yesterday, thanks in part to a 17% rally since the start of June. If we look at FB stock, we see that it fell post-earnings despite strong earnings, largely because revenues were not the blowout some had expected. To me, that foreshadowed the fact that we could start seeing some P/E multiples contract in the sector.
With LinkedIn earnings now released, that seems to be exactly what is happening.
After-hours, LNKD stock went on a bit of a rollercoaster (as seen in the chart below). Shares had fallen 2% during the market hours leading up to the report … then soared as much as 15% in after-hours trading only to reverse to as deep as 10% losses. LNKD stock opened trading Friday at a 9% discount to Thursday’s close.
The negativity, as I predicted, wasn’t due to an earnings miss, though. LinkedIn indeed soared over the low bar set for it, posting adjusted earnings of 55 cents per share vs. a consensus of just 30 cents per share. Revenue, meanwhile, increased an impressive 33% to $712 million, topping the consensus of $680 million easily.
But when investors looked beyond the raw numbers, they likely realized that good news was already priced into earnings … and that the bad news was just being well-disguised. The most concerning part of the earnings call was the the fact that, in the second quarter, display revenue fell 30% — 20 percentage points worse than Q1’s decline.
As Bloomberg reported, the company attributed strength — including a raised sales forecast — “to its acquisition of the education website Lynda.com, raising concerns that growth is slowing in its main business.”
The question marks with regards to growth are especially worrisome in the wake of the premium on LNKD stock, which is why this was one rollercoaster I didn’t want to ride heading into the report. As I already mentioned, countless tech stocks have been bid up so far this year but, as second-quarter earnings demonstrate, a high stock price means high expectations.
Investors should proceed with caution with the sector, just as we did with LNKD stock.
Hilary Kramer is the editor of GameChangers and Breakout Stocks Under $10.
