For years, crusty old value investors have hammered LinkedIn Corp (LNKD) for its overvaluation. After Thursday’s disastrous earnings report, LinkedIn stock doesn’t look all that overvalued anymore.
Shares of the online social networking site for professionals are down more than 40% in Friday morning trading. While LNKD actually had a solid fourth quarter — sales and earnings topped the consensus — weak guidance for Q1 and the full-year was its undoing.
The company expects non-GAAP per-share earnings of 55 cents on sales of $820 million in the current quarter. That’s well shy of the Street’s estimates for 75 cents per share on $868.3 million. Further, EBITDA guidance for $190 million trailed the average estimate of $213.9 million.
LinkedIn Stock’s Dilemma: Declining Sales Growth
LinkedIn’s earnings have routinely been all over the map since going public in May 2011. So the disappointing EPS guidance is nothing new. The real problem is its sales: If LinkedIn’s guidance is correct, the $820 million in revenues would mark growth of 28% from the first quarter of 2015 — certainly nothing to sneeze at.
However, 28% is sales growth is paltry compared to the triple-digit growth in 2011 and the 86% growth in 2012. In 2013, LNKD’s sales growth dipped to the 50% range. In 2014, it fell to the 40% range. Last year, it was 35%. That’s a pretty steady downward trend.
Not that it’s abnormal; most companies see sales growth slow as they mature. But with profits perennially up and down, better-than-average sales growth has long been LinkedIn’s calling card. As that growth dwindles, so does the appeal of LinkedIn stock.
Furthermore, it’s difficult to reverse an investment trend once it starts to pick up steam. LinkedIn stock has been trending downward for more than a year. Shares were down 29% from their year-ago peak reached when the market closed on Thursday. Within an hour of that close, LNKD stock was down 49% from those February 2015 highs. And it’s still falling.
That said, the 33% overnight drop into the 40% morning decline seems like a gross overreaction. Especially considering that Q4 non-GAAP EPS of 94 cents and sales of $862 million exceeded expectations.
This is a turning point for LinkedIn stock, as the focus on LNKD’s negative guidance proves the bears have full control these days. What’s more, LinkedIn’s stock hasn’t traded above its 50-day moving average in two months. It’s now well below its 200-day moving average.
Bottom Line on LNKD Stock
LinkedIn will likely bounce back a bit in the days ahead. The 40% gap down isn’t likely to stick for a company with growing sales and earnings.
Still, the long-term trend is troubling, lumping LNKD in with the likes of the downtrodden Twitter (TWTR) rather than crowd-pleasing Facebook (FB). So unless you’re looking to make a quick buck in the next few weeks, don’t add LNKD to your long-term portfolio.
Initial excitement for LinkedIn, a company most investors knew and many used, helped the stock nearly triple in its first two-and-a-half years after going public. The strong sales growth helped keep it afloat until early last year. Now that sales aren’t growing as fast, the excitement has evaporated and reality has set in.
On Friday, that reality hit hard.
As of this writing, Chris Fraley did not hold a position in any of the aforementioned securities.
