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LinkedIn (NASDAQ: LNKD) stock is the latest tech issue to fall off a cliff. The stock is now down 55% year-to-date and at the lowest levels since 2012.
A weak earnings report led to the plunge. But should shares really be cut in half based on just an earnings report? And could this be a big buying opportunity for investors that missed out on the hot tech IPO a few years back?
Let’s start with the details on LinkedIn’s results. LinkedIn’s fourth-quarter earnings topped expectations, but the company’s guidance for the first quarter disappointed.
LinkedIn guided for revenue of $820 million and $0.44 a share in earnings for the first quarter. Wall Street had expected $868 million in revenues and $0.75 a share in earnings.
This signaled to the market that LinkedIn’s business model is broken and that it hasn’t figured out how to properly monetize its users. The company isn’t getting marketers to consider LinkedIn as an advertising destination.
Is the LinkedIn Stock Selloff Justified?
The entire tech space has suffered. Another big social media stock, Twitter (NASDAQ: TWTR), has tumbled nearly 40%. Both LinkedIn and Twitter can’t figure out how to monetize their users, not to mention the fact that user growth might be slowing on both platforms.
Before the selloff in LinkedIn stock, some 41 Wall Street analysts had ratings on the stock; 37 had the stock rated as a “buy” and none had a “sell” rating. Wall Street was overly exuberant on LinkedIn and the selloff appears justified.
Investors appear to have overestimated the potential of LinkedIn’s ad business, called its Marketing Solutions business segment. During the fourth quarter of 2014, this business grew 56%, its fastest-growing business at the time. However, during the fourth quarter of 2015, the ad business grew by 20%, less than half what it did last year. This was also a slowdown from the 28% growth in the ad business during the third quarter of 2015.
The Competitors for Advertising Dollars
Other companies are making money in online advertising, however. This includes Alphabet (NASDAQ: GOOG) and Facebook (NASDAQ: FB). Enticing marketers is tough, as Twitter investors found out once again yesterday when the company posted weak earnings. It’s a race for both LinkedIn and Twitter to see who can get interest from marketers the fastest.
Facebook is still “winning” because it beat both Twitter and LinkedIn to the punch. It started soliciting marketers earlier and has convinced them to continue buying ads on Facebook. Part of what has helped Facebook hold off the competition is its much larger user base.
But the one company that seems to have perfected the art of making money from ads is Google. It has been in the ad business for over a decade – generating close to 99% of its revenue from ads. It overtook Apple (NASDAQ: AAPL) as the largest public company in the world earlier this year.
If you want to play the tech space, the best bets seem to be either Facebook or Google, and certainly not LinkedIn. Shares of Google are are trading at less than 17 times next year’s expected earnings, and Facebook trades at 24 times. Both are trading at a discount to Twitter.
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