As far as one-day price drops go, for a stock to lose more than 40% there is never to going to be a shortage of attention – even more so when that particular stock happens to be a tech giant. Despite posting revenue and earnings results for the fourth quarter that beat analysts’ forecasts, LinkedIn was pummeled in trading on Friday morning as the company signaled that revenue and earnings for Q1 of 2016 were being revised dramatically lower – forecast sales of $820M vs $868.3M; projected EBITDA of $190M vs $213.9M; and EPS of 55c vs 75c.
While a drop of 40% may come as a surprise to some, the stock has been declining since last year when it topped $270, led by inconsistent profits and an ongoing decline in its growth. While normally a (forecast) 28% increase in revenue would be favorable, in the context of the company’s history it might just suggest LinkedIn is running out of momentum – over the last 5 years, sales growth has dropped as follows: >100% (2011); 86% (2012); 50-odd% (2013); 40-odd% (2014); 35% (2015). Amidst the current bear market, investors have also made it clear that current results don’t offset weak forward guidance, and will punish companies accordingly. The exception has been companies like Facebook and Google, who have exceeded analysts’ forecasts by a wide margin and seen their stock prices react positively.
With the stock plunging below $110, perhaps we have seen an initial overreaction from the market that often accompanies growth stocks failing to live up the market’s expectations. As such, our outlook is that we expect the stock to temporarily increase as part of a short term bounce, however, in the absence of any further updates on the company’s growth or renewed confidence in the markets, we see the price continuing lower.
Disclosure: Ser Man Traders do not hold any shares in LinkedIn (LNKD)