LinkedIn sinkin': $10bn gone in one day as shares plummet 40%

A rough start of the year for tech stocks was amplified Friday when job-based social media company LinkedIn saw its shares plummet over 40 per cent, wiping $10bn off its value thanks to weak earnings.

The company announced that sales for the current quarter would be six per cent lower than expected ($820m on expectations of $867m), but critically, earnings per share were more than 25 per cent lower than expected. The news sent the shares into freefall.

Despite the massive drop, it is not as bad news as you might think for LinkedIn. The company is in good shape and has a pretty solid foundation of over 400 million users, both paying and non-paying.

What LinkedIn did suffer from, however, has been unjustifiable exuberance on the part of the stock market: its shares were running at more than 50 times its earnings. That is nearly double what similar tech stocks are valued at, and two-and-a-half times the S&P average of 20 times earnings.

The sign that LinkedIn was no longer exhibiting stellar growth popped that valuation pretty quickly. The share drop brings LinkedIn's share price to around 33 times its earnings, so it is possible that it may drop again if growth doesn't pick up next quarter.

In terms of growth, LinkedIn was running at 35 per cent and that has slowed to around 20 per cent, despite determined efforts by the company to become more than a job search tool and start bringing in user-generated content and make the site more of a Facebook-for-suits.

That effort has led to 7 per cent more visits to the LinkedIn site and a jump of 26 per cent on clicks. The company's new mobile app is also garnering praise in much the same way as Facebook's mobile strategy.

But with many expecting 2016 to be the year of reckoning for many grossly over-valued tech companies, and with tech stocks dropping faster than a stock market that has done little but go down since the start of the year, it looks like LinkedIn was in the wrong place at the wrong time. What this all means for companies that aren't making any money remains to be seen. ®

PS: Salesforce's stock price is also down by 12 per cent to $58; Workday is down 16 per cent to $54; NetSuite is down 14 per cent to $60; Tableau is down 50 per cent to $41... it's been a bloodbath for cloud biz and tech shares in general.