LinkedIn's Share Price Drops Despite Strong Q2 Report

- August 3rd, 2015

LinkedIn’s unexpectedly strong Q2 report was followed by a decline in share price. Investors realized that the company’s increased revenues came from an acquisition rather than core business growth.

LinkedIn’s (NYSE:LNKD) share price dropped in after-hours trading last Thursday following the release of the company’s second-quarter report.
Even so, the results were stronger than anticipated, with the company reporting $711.7 million in sales, a 33-percent increase from the previous quarter. That surpassed the company’s guidance of $670 to $674 million, as well as Thomson Reuters’ (TSX:TRI,NYSE:TRI) estimate of $680 million. The company also increased its full-year revenue forecast to $2.94 billion after slashing it to $2.9 billion this past April.

Investor response

LinkedIn’s share price initially jumped in response to its quarterly report, with Business Insider reporting an increase of more than 14 percent in after-hours trading. However, this high was followed by a decrease, with the company’s share price ultimately settling down around 5 percent.
This downturn has been attributed to concern that LinkedIn’s sales growth came on the back of its acquisition of skills-training video website lynda.com, not due to strength in its core business. And indeed, LinkedIn anticipates that the acquisition will ultimately contribute $90 million in sales for the year, a $50-million increase from previous estimates.
LinkedIn is also experiencing a decline in display ads, with Q2 display ad revenues dropping by 30 percent (even more significant than the 10-percent decrease seen in Q1). Mark Mahaney, an analyst at RBC Capital Markets, told The Wall Street Journal, “essentially they are lowering their guidance.” In other words, the acquisition of lynda.com has concealed disappointing growth and decline in other areas of LinkedIn’s business.

Challenging quarter for social media companies

LinkedIn isn’t the only social media company that investors are feeling wary of — it has been a difficult second quarter for major social media companies across the board.
For example, The Globe and Mail reported that Twitter’s (NYSE:TWTR) share price declined about 12 percent last week, trading near its two-year low. This downturn is attributable to concerns about the company’s ability to attract users, as well a startling wave of departures. The Financial Times estimates that at least 450 employees have left the company in the past year, including CEO Dick Costolo, Head of Corporate Development Rishi Garg and Head of Communications Gabriel Stricker.
Even Facebook’s (NASDAQ:FB) spare price sank 2.6 percent last week, despite higher-than-anticipated revenue figures and an effective mobile advertising strategy. The Globe and Mail suggests that this decrease may be attributed to alarm over the company’s 82-percent increase in expenses.
Because different social media companies are struggling with different issues, investor concerns can’t be generalized across the entire market. However, it’s clear that investors looking at social media stocks read beyond the headlines to critically evaluate how companies are actually doing. Social media companies must be aware of that as they navigate this growing, and increasingly competitive, market.
 

Securities Disclosure: I, Morag McGreevey, hold no direct investment interest in any company mentioned in this article.

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