You’ve likely heard of LinkedIn Corp (LNKD) — the online professional social network. You probably have a LinkedIn profile of your own, and perhaps have even been following LinkedIn as a company and investment.
That’s because, since early February, LinkedIn stock has been a trainwreck that’s hard to watch but also hard to turn away from. All in all, shares have lost more than 40% of their value.
The catalyst for that decline was the company’s most recent earnings report. While the fourth-quarter results were fine and dandy (or at least above what Wall Street expected), the company’s outlook sent investors fleeing in droves.
Revenue came in below the consensus, but the earnings gap was the bigger news.
At the time, the first-quarter consensus was 72 cents per share, while the full-year consensus was north of $3.70. The company, meanwhile, projected just 55 cents per share for Q1 and at most $3.20 per share for the full-year.
LinkedIn has handily beat expectations in the last three quarters — beating from 20% to as much as 83% — so there’s a good chance management could be simply setting a low bar. The analyst community either thinks so, or has been slow to react. They’ve adjusted the consensus for Q1 to 60 cents.
With that in mind, it’s tempting to say that LinkedIn stock simply needs a monster earnings beat to pull out of this two-month funk. Unfortunately, calling the recent decline a funk is probably inaccurate. Instead, this is representative of a larger shift taking place at LinkedIn.
Problems at Home for LNKD Stock
LinkedIn stock ran up (as did its premium) when it was one of the few social media companies that seemed to have a reliable business model with the ability to consistently post profits — and because it had strong growth on tap.
Recently, though, sales have continued to grow but LinkedIn has been spending all the money that comes in and then some. Last year, the company’s lost a total of $151 million — almost as much as the prior four years’ profits combined.
In a sense, LinkedIn and a company like Facebook Inc (FB) have traded places, with the latter being a poster child of monetization and LinkedIn losing its original advantage.
And even Facebook took a beating after its recent earnings report — something I said foreshadowed the contraction of price-to-earnings ratios in the tech sector.
Before the February sell-off, LinkedIn stock was selling at a generous multiple of 70 times next year’s estimates. So it’s easy to see why investors — especially in this market — were especially skittish at the prospect of lower earnings. The general trend of LinkedIn isn’t that favorable, and the stock had been priced for perfection.
Bottom Line for LinkedIn Stock
The recent beating is both a blessing and a curse for LinkedIn. On the one hand, LinkedIn actually looks reasonably priced. The stock’s long-term growth is around 26% while its forward P/E — factoring in the disappointing outlook and adjusted consensus — is right around there too.
On the other hand, LinkedIn stock is now suffering from some serious sentiment headwinds and layers of resistance.
While I do think an earnings beat could spark at least a short-term recovery, many investors will likely leave after the slightest bounce.
Instead of trying to bargain-hunt, I’d wait for signs that a fundamental shift in the company’s spending habits is underway before betting on a recovery.
Hilary Kramer is the editor of GameChangers, Breakout Stocks Under $10, High Octane Trader, Absolute Capital Return and Value Authority. She is an accomplished investment specialist and market strategist with more than 25 years of experience in portfolio management, equity research, trading, and risk management. She has extensive expertise in global financial management, asset allocation, investment banking and private equity ventures, and is regularly sought after to provide her analysis on Bloomberg, CNBC, Fox Business Network and other media.
