What's behind LinkedIn's dramatic fall?

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Why a Wall Street darling has taken such a dramatic tumble.

While Facebook and Google's parent Alphabet both surprised Wall Street with better-than-expected earnings, LinkedIn's Thursday afternoon forecast for its next year so dramatically disappointed that business network's shares plummeted over 40 percent on Friday.

So how can LinkedIn, once praised for its diverse revenue streams from three different businesses, take such a dramatic about-face? Why would the stock, already down about 20 percent over the prior year, lose so much more, when Facebook and Google soared on their results?

"They're fundamentally different companies; Google and Facebook are ad revenue businesses, and LinkedIn is 60 or 65 percent enterprise subscription revenue," said RBC analyst Mark Mahaney, who cut his rating on the company from Outperform to Sector Perform and slashed his price target to $156 from $300.

Each of LinkedIn's three businesses is facing its own challenges. LinkedIn cited softness in Europe, the Middle East, Africa and the Asia Pacific Region. "Today we hear Obama talking about global weakness impacting U.S. firms, and LinkedIn is a great example of that," said Mahaney. "It's a little surprising that Facebook and Google didn't call it out, maybe they're having such strength in the business."

And expectations of a robust subscription business are falling flat. "Companies with high predictability do get valuations that are at significant premiums to other Internet companies," said James Cakmak, an analyst at Monness, Crespi, Hardt & Co. "As a result of this lack of confidence in LinkedIn's topline, the valuations associated with this will be chopped in half from where we were yesterday. This is a confidence issue, a predictability issue, and it's not something that's going to be fixed overnight."

LinkedIn's marketing solutions business, which is shifting away from display ads towards sponsored updates is facing tough competition from Facebook and Google. "Ad dollars on the Internet are concentrating on Google and Facebook, and if you're not one of those two you're really getting scraps," said Mahaney. "LinkedIn's value proposition to advertisers isn't as compelling as Google and Facebook."

Mahaney points to the fact that LinkedIn's legacy display ads business is "declining materially year over year," similar to the declines Yahoo's display ads are suffering. And LinkedIn is shutting down its Lead Accelerator business, which would create a $50 million revenue headwind this year, a plan to allow ad customers to effectively use LinkedIn profile information to run campaigns off network. Mahaney warned that the challenge in competing with Facebook and Google's ad network could also hit Twitter when it reports earnings next week.

So does it make sense that Facebook and Google both traded down on LinkedIn's disappointing results? (Facebook dropped as much as 6.5 percent and Google 3.5 percent.) Cakmak said no, calling Facebook and Google "the best positioned digital companies, technology companies, in the world to win advertising dollars. And the dollars are only flowing in one direction, and that's analog to digital, and those companies both have the scale."