LinkedIn had long been a darling of both Wall Street and Silicon Valley -- it had a diversified business, a stable and strong management team and nothing but strong growth ahead, or so it seemed. Until now.
On Thursday, the company warned that 2016 was not looking as rosy as they expected, and investors reacted swiftly. As the market opened, LinkedIn lost 40% of its value. Roughly $10 billion of the company's approximately $25 billion market cap evaporated instantly. By mid-afternoon, shares were trading nearly 45% below Thursday's close.
It was LinkedIn's worst loss ever.
Never mind that LinkedIn's fourth quarter results beat analysts' estimates for both revenue and earnings. Investors focused on 2016 and didn't like what they saw. LinkedIn warned its revenue and earnings for first quarter and full-year would fall short of analysts' estimates. Revenue was likely to be $820 million, not the $867 million Wall Street expected; adjusted earnings would be 55 cents per share, far short of the 74 cents analysts expected.
Why did LinkedIn's upward trajectory suddenly changed, and why was Wall Street's reaction so negative? Here are five factors:
1.Macroeconomic weakness: On a call with analysts and investors, LinkedIn said economic slowdown in Europe, the Middle East, Asia and Africa isn't expected to be massive, but will dampen sales. The company said this weakness could cause revenue growth in field sales (sales which are made via LinkedIn's sales team), to fall to mid-20%. At the end of last year, field sales revenue growth was about 30%.
2. The shutdown of "Lead Accelerator": LinkedIn is shutting down part of its business-to-business marketing service, called "Lead Accelerator," a product that LinkedIn formed after its acquisition of business marketing firm Bizo. LinkedIn said it expects the move to reduce revenue by $50 million this year but will allow the company to direct resources to better performing products.
3. A slowdown in "online sales": LinkedIn's total revenue growth was 34% in the fourth quarter, down from 37% in the third quarter. LinkedIn's CFO Steve Sordello on Thursday put the blame in part on "online sales," or products that customers purchase on LinkedIn without any interaction with a sales representative. Those products, such as "Recruiter Lite" or "Premium Subscriptions," weighed on LinkedIn's 2016 guidance, Sordello said.
4. Impact from foreign currencies: LinkedIn said currency movements are expected to lower the company's growth by 2% in 2016.
5. New products weren't baked in: LinkedIn's new "Recruiter" and "Referrals" enterprise products, which are rolling out this year, weren't factored into LinkedIn's 2016 forecast and could offer a meaningful boost to revenue.
It's now clear that LinkedIn faces a much tougher road ahead. But when it comes to parsing why investors turned on the company so dramatically, or what it will take for LinkedIn to get out of the penalty box, analysts are divided.
Victor Anthony, an analyst at Axiom Capital Management, saw macroeconomic weakness as the most important factor. He noted, however, that in today's markets, even earnings and forecasts that miss Street estimates by a relatively small amount can dramatically hurt a stock.
"We’re dealing with a market that’s unforgiving and unrelenting," Anthony said. "Stocks that don’t produce results that are stellar are going to get hit and get hit really bad. Any negativity has led to, in most cases, overreaction."
LinkedIn's marketing solutions business, which sells native advertisements, saw a bigger drop in revenue growth than any other segment of LinkedIn's business, falling from growth of 28% in the third quarter to 20% in the fourth quarter, in part because of the decline of display advertising. Despite the struggles of this unit, it does contain LinkedIn's fastest growing monetized product, sponsored updates, LinkedIn's version of native advertising. LinkedIn said it sees self-service ad products as an area of high growth potential.
"We’ve been investing in making it easier for people to use our self-service tools, and that’s an area of opportunity," LinkedIn's CEO Jeff Weiner said on Thursday's call.
RBC Capital Markets analyst Mark Mahaney warned in a note on Friday that LinkedIn's core business, its hiring business known as Talent Solutions, is maturing and could inhibit LinkedIn's rebound. Revenue growth in Talent Solutions slowed to 45% in the fourth quarter from 46% in the third quarter. LinkedIn said it currently has 42,000 corporate customers, but said it will stop offering this metric in future earnings reports.
"To the extent the... factor is material, it could be hard to see a material re-rating for LinkedIn shares," Mahaney said.
LinkedIn's stock rose nearly 190% between its May 2011 IPO and its all-time high of $269 February last year, when shares started slipping. LinkedIn's stock has fallen more than 51% this year to $107.02 at 2:49 p.m. E.T. on Friday.
