Shares of LinkedIn tanked in a major way Friday, despite the company reporting better than expected revenues and earnings for the fourth quarter of 2015. The stock dropped 40% in the first minutes of trading, and never recovered, ending the day 43.63% lower as it had its worst day ever and fell to a more than three year low.
There are several reasons for the extreme drop in share price which wiped out $10 billion in market capitalization for the company. We’ll look more closely at these reasons to try and determine if the sharp fall was warranted, or if it was overdone and makes shares of LinkedIn a good candidate for a rebound in the coming weeks and months.
As you probably already know as an experienced investor, moves in markets can often go beyond what the fundamentals dictate, setting up some spectacular recoveries. On the other hand, these extreme moves can also go further and last longer than anyone would predict. Whenever we see volatility like this extreme caution is needed, but those who have the nerve to step in and trade their conviction can often make excellent profits.
So, putting the solid fourth quarter profits and revenues aside, what is it that caused shares of LinkedIn to tank so spectacularly on Friday?
LinkedIn Future Guidance
LinkedIn has been one of the darlings of the tech industry, with solid management, a stable and diversified business, and strong growth. At least that’s the way it looked until Friday.
After reporting a 34% increase in revenue from $643.4 million in the fourth quarter of 2014 to $862 million in the fourth quarter of 2015, which beat analyst’s expectations, LinkedIn dropped a bombshell for their 2016 forecast. They surprised markets and analysts by projecting lower growth, lower revenues and lower earnings that previously anticipated.
Markets are always fixated on the future, as binary option traders well know, and even though results are strong right now, investors focused instead on the company’s own projections for lowered growth, dumping the stock enmasse and nearly cutting the stock in half.
The company projected first quarter revenues of $820 million versus expectations for revenues of $867 million. They also cut their full year guidance for 2016, projecting revenues of $3.6 to $3.65 billion versus expectations of $3.91 billion in revenues expected by analysts. In addition, LinkedIn said that first quarter profits would be just $0.55 a share versus analyst expectations of $0.74 a share in profits.
Investors were understandably cautious following the lowered 2016 projections and showed their disappointment by dumping shares. But did they go too far? Growth is still expected to be strong, even if it isn’t as strong as hoped for by investors prior to the Thursday conference call.
Multiple Analysts Cut Forecasts for LinkedIn
After the conference call and reduced guidance from LinkedIn many analysts changed their guidance on the stock, creating a cascading effect.
Eight different research groups downgraded the stock from buy or outperform to market neutral, while also cutting their price targets. Both JP Morgan and Monness, Crespi & Hardt downgraded the stock and referred to headwinds to the business as a reason for the downgrade. JP Morgan also cut their price forecast from $300 a share to $180 a share, which was substantial, but the new price target is still significantly above the current price.
On a more positive note, there were six firms that maintained a buy rating on the stock, though all of them cut their price targets significantly. Even so, most price targets remain in the $200 a share range or higher, giving the stock a forecast of a 100% increase in the coming year. Pacific Crest even stated that they believe the fall in the stock price was “overdone”, indicating they at least are looking for a bounce in the shares in the near future.
After the smoke cleared there are still 29 analysts calling the stock a buy versus 36 prior to the conference call. Hold recommendations jumped from 7 to 16 and there are still no analysts recommending to sell the stock. In addition, the average price target for the stock is $205.40 a share versus the current price of $107.13, leaving room for the stock to nearly double in the coming months.
The future for the stock may not look as bright as it once did, but it still looks pretty rosy. In fact, the current price targets leave more potential upside for the stock now versus prior to the Friday sell-off.
Macroeconomic Headwinds for LinkedIn
One of the largest concerns highlighted by the company are the macroeconomic headwinds it is experience due to a slowdown in global growth. The company cited economic weakness in Europe, Asia, Africa and the Middle East as a reason for slowing sales growth in those regions that will weigh on LinkedIn revenues in 2016.
Revenue growth last year from those areas was 30%, but the company expects revenue growth to slow to the mid-20% region in 2016.
Also cited was the impact of a stronger USD, which is expected to cut company profits by 2% in the coming year, though that is uncertain considering the recent weakness seen in the USD and the increasing probability of the Federal Reserve delaying interest rate hikes in the U.S.
LinkedIn Lead Accelerator Shutting Down
Several analysts pointed to the decision to shut down the Lead Accelerator program at LinkedIn as a bad choice. Lead Accelerator is a business-to-business marketing service that was formed after the acquisition of marketing firm Bizo. The company admits it will likely lose $50 million in revenues due to shutting down the service, but points to costs savings as offsetting the revenue losses, and commented that they had not expected the resources necessary to scale the service successfully to be so great.
The company also reminded investors that they will be rolling out the new Recruiter and Referrals enterprise products in 2016, and neither of these have been included in the 2016 forecast. Either one, or both, could significantly impact revenues to the upside, and lead to a revenue and earnings beat versus the company’s current forecast.
Technical Analysis for LinkedIn
LinkedIn shares had already been falling since November, coming off highs near $250 a share and hitting levels of $200 as the stock became oversold and turned sideways in the week leading up to the earnings report and conference call.
On a five year chart we can see that the 200 period moving average had been supporting the stock, but Friday’s drop sent price sharply through the level. The 200 moving average should now act as resistance, and is currently sitting at $186.50, which indicates the stock could make a solid recovery even while remaining bearish based on moving average analysis.
Friday’s move also sent the Relative Strength Index heavily into oversold territory and it now sits at 16.15, which is extremely low. While the RSI could remain quite low for a short period of time it is unlikely it will remain so depressed for more than a week. Keep in mind though that this by itself doesn’t indicate a coming rally as the stock could turn sideways and see the RSI level rise.
It is also notable that the $100 level acted as support for the stock throughout much of 2012 and is likely to do so again.
The Bottom Line for LinkedIn
Whenever we get such extreme moves in stocks it can be tempting to jump in and trade in the opposite direction in the hope that the move may be overdone. While this could be the case with LinkedIn, there are many examples where an extreme move in an asset remained extreme for far longer than anyone thought it could. This by itself argues that caution should be maintained.
That said, keeping shares of LinkedIn on your trading radar could prove to be a smart move, as the potential for a rebound exists when looking at both fundamental and technical factors. Plus the support at the $100 level and current heavily oversold indicators should serve to limit further downside for the stock.