LinkedIn Falters As Reality Catches Up On Tech

by CXOtoday News Desk    Feb 08, 2016

techflop

A steady decline in some of the technology shares underscored investor worries about the the lackluster corporate outlook in the tech sector in 2016. The biggest and most recent example is online professional network, LinkedIn projected revenue this year would increase roughly 22 percent, down from 35 per cent in 2015, and far below analysts’ expectations. The company’s shares tumbled 44 percent on the weekend following its disappointing fourth quarter earnings forecast. Another IT company, data-analysis software maker Tableau Software too, posted lower than expected growth projections for 2016 and its shares plunged 49 percent.

The Nasdaq Composite Index for tech companies dropped 3.2 per cent on its way to a 5.4 per cent drop for the week, sending alert to the sector, which has been a mixed bag of late in terms of earning. Profitable tech firms such as Facebook, Amazon.com, Netflix and Google parent Alphabet also all slumped at least 3 percent in the US on Friday, including a 5.8 percent decline in Twitter.

Analysts believe, the vulnerability of the technology sector at a time when the US economy is expanding in fits and starts, corporate earnings are under pressure, and investors are concerned that global economic problems will spill over to the US. As Tableau chief executive Thomas Walker told analysts. “We did see our customers continue to expand their use of Tableau in the organisations, but not at the same cadence we’d historically experienced.”

While the prospects of firms such as Facebook and Google are not directly affected by poor results at smaller tech firms in different fields, all the companies have been trading at high valuations, a factor that makes them vulnerable to selling for essentially any reason. And if any of tech’s high-flying companies falter, analysts say, other stocks will be even more vulnerable.

“It’s the realization that the world is slowing,” said Michael Antonelli, an equity sales trader at brokerage Robert W. Baird. He added that poor earnings at LinkedIn and Tableau, together with high earnings multiples and fears of slowing US growth, were causing investors to retreat from risk, for fear that earnings growth would decline in coming months.

Disruptive technology will continue to drive the transformation of legacy business models this year, according to Fitch Ratings’ new outlook report for the sector. Fitch expects both opportunities and threats to the operating profiles of market participants from the acceleration of time-shifted on-demand consumption of video services, the potential impact of spectrum auctions and the ongoing disruptive effects related to the secular shift to cloud based technologies.

Fitch’s outlook for the technology sector is negative, reflecting slowing growth and the soft end-market demand profile within the sector. This combines with the accelerating transition to cloud based technologies, which will continue pressuring revenue growth prospects of companies with significant exposure to legacy technologies. 

Event risks will be elevated during 2016, particularly within the technology sector as Fitch anticipates M&A activity to focus on enhancing revenue growth prospects and strengthening cloud-based technology capabilities. Fitch believes these transactions will be largely debt financed resulting in weaker credit profiles. Additionally activist investor related event risk remains relevant during 2016 due to revenue headwinds and elevated cash balances.

LinkedIn Chief executive Jeff Weiner said, “There has been increasing demand, in terms of large-scale multinational enterprises. And again, it’s going to take time to continue to roll out the product, and ensure that companies are ready to fully embrace social selling. It’s a new practice, and we’re looking forward to continuing to educate the marketplace,” he said. 

Fitch also believes the rapid pace of cloud adoption may weaken long-term recurring revenue models and FCF profiles. However, some others see signs of trouble with cloud services providers as well. Salesforce, cloud-based customer-relationship company with annual revenue exceeding $US6 billion, fell 13 percent this quarter. Smaller firms were hit harder: Splunk fell 23 percent and NetSuite 14 percent, among others.

The trend also pointed to concerns about the US economic outlook, with its negative implications for corporate earnings, and high valuations. “Investors appear to be much less willing to pay up for growth today than they were yesterday,” Bespoke Investment said in a research note. “This looks like a case of “valuations don’t matter … until they do.”

“In this market, there’s no mercy for a miss,” James Cakmak, an analyst at Monness Crespi Hardt & Co, told Bloomberg. Take the LinkedIn example, which had long been a darling of both Wall Street and Silicon Valley with diversified business, a stable and strong management team and a strong growth outlook until now. But it suffered its worst loss ever, despite that LinkedIn’s fourth quarter results beat analysts’ estimates for both revenue and earnings.

The problem is with the growth outlook in 2016, owing to poor micro-economic outlook in the next 12 months, say, on a call with analysts and investors, LinkedIn said economic slowdown in Europe, the Middle East, Asia and Africa isn’t expected to be massive, but will dampen sales, lack of innovative offerings and 

Victor Anthony, an analyst at Axiom Capital Management, saw macroeconomic weakness as the most important factor. He noted, however, that in today’s markets, even earnings and forecasts that miss Street estimates by a relatively small amount can dramatically hurt a stock. “We’ve been investing in making it easier for people to use our self-service tools, and that’s an area of opportunity,” LinkedIn’s CEO Jeff Weiner said on Thursday’s call.

RBC Capital Markets analyst Mark Mahaney warned in a note on Friday that LinkedIn’s core business, its hiring business known as Talent Solutions, is maturing and could inhibit LinkedIn’s rebound. Revenue growth in Talent Solutions slowed to 45% in the fourth quarter from 46% in the third quarter. LinkedIn said it currently has 42,000 corporate customers, but said it will stop offering this metric in future earnings reports.