Stock an­a­lysts lose the plot at Linkedin

▶ The com­pany’s stock rout prompts a rare col­lec­tive “oops” ▶ “Linkedin seemed to have the se­cret sauce”

Bloomberg Businessweek (North America) - - Contents -

It’s not of­ten Wall Street says “I’m sorry.” But af­ter Linkedin re­ported its earn­ings on Feb. 4, about a dozen fi­nan­cial an­a­lysts with vary­ing strate­gies and sen­si­bil­i­ties is­sued mea cul­pas. Some had rated Linkedin a buy a few hours be­fore its down­graded fore­cast. They watched in hor­ror as its stock fell more than 40 per­cent, bot­tom­ing out below $104 on Feb. 5. Some put it more sim­ply than oth­ers. “We were wrong,” Suntrust Robin­son Humphrey an­a­lyst Bob Peck wrote in a Feb. 5 note down­grad­ing the stock to “neu­tral.” (He’d praised Linkedin’s

odds of con­tin­ued progress two weeks ear­lier.) Mizuho Se­cu­ri­ties lamented the com­pany’s “sig­nif­i­cantly slower” growth prospects, while James Cak­mak at Mon­ness Crespi Hardt said he was no longer sure even Linkedin’s slower growth would be sus­tain­able.

Linkedin took a beat­ing even though its earn­ings re­port was con­sis­tent with re­cent per­for­mance. As usual, it beat earn­ings ex­pec­ta­tions, then is­sued a lower-than-ex­pected sales fore­cast for the year. It de­liv­ered a sim­i­larly dis­ap­point­ing pro­jec­tion in last year’s se­cond quar­ter, at which point its stock dipped 19 per­cent. But now Wall Street is more skep­ti­cal of the tech stocks it once as­sumed would grow for­ever.

Un­til Feb. 5, Linkedin looked like an ideal tech stock to own, al­most like a com­bi­na­tion of Face­book and Sales­force.com. A free net­work for pro­fes­sion­als, it has the in­gre­di­ents to grow vi­rally, like a so­cial me­dia com­pany. It sells ser­vices to re­cruiters, sales­peo­ple, and mar­keters, giv­ing it sev­eral ways to snag re­cur­ring rev­enue. “This was con­sid­ered one of the pre­em­i­nent names, like Face­book and Google,” says Peck.

With the Nas­daq down 14 per­cent and the over­all mar­ket down 8 per­cent since Jan. 1, it’s time to be care­ful, says Ja­son Lemkin, an in­vestor who runs Saastr, a site that ad­vises soft­ware com­pa­nies. “Linkedin seemed to have the se­cret sauce, and ev­ery­one pre­dicted in­fi­nite growth,” he says. Now re­al­ity is set­ting in, and to ex­pand, Linkedin has to do more dif­fi­cult and ex­pen­sive things, like de­vel­op­ing and sell­ing more prod­uct lines. “When com­pa­nies hit th­ese growth walls, peo­ple just re­act re­ally strongly,” says Lemkin.

Walls are spring­ing up all over. On its earn­ings call, Linkedin an­nounced it had shut down Sales Ac­cel­er­a­tor, a soft­ware tool de­signed to con­nect busi­nesses with po­ten­tial cus­tomers, be­cause of a lack of in­ter­est. An­a­lysts had said the fea­ture would be worth mil­lions. Linkedin’s over­all user growth slowed, it got tougher to hold on to paid users, and the com­pany had to lean harder on its sales staff. Small fac­tors added up, and an­a­lysts were “blind­sided,” says Mon­ness Crespi’s Cak­mak.

Anand San­wal, co-founder of re­searcher CB In­sights, ques­tions whether the an­a­lysts who blew their Linkedin pre­dic­tions are worth lis­ten­ing to, given the cur­rent in­dus­try up­heaval. “Equity re­search an­a­lysts are in that camp of guess­ing and sound­ing im­pres­sive, but also work­ing with th­ese mod­els that are rel­a­tively shaky,” he says. “They work well when things are slow and steady but don’t work well when peo­ple are thrown a curve­ball.”

Linkedin is un­likely to be the last com­pany hit by a pitch, says San­wal. In­vestors in pri­vate com­pa­nies of­ten base their val­u­a­tions on pub­licly traded stocks like Linkedin. With even Ap­ple and Ama­zon.com be­ing pun­ished might­ily for their re­cent quar­terly dis­ap­point­ments, com­pa­nies in the spot­light can’t af­ford many mis­steps, says Suntrust’s Peck. As for his own line of work, he says: “At the end of the day an­a­lysts need to rely on their re­search, not what the com­pany says.”

“When com­pa­nies hit th­ese growth walls, peo­ple just re­act re­ally strongly.” ——Ja­son Lemkin, Saastr

The bot­tom line Linkedin watch­ers felt com­pelled to apol­o­gize af­ter shares dropped 40 per­cent fol­low­ing a di­min­ished earn­ings fore­cast.

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