I lived through the dot-com period. I lived through it and saw more than 300 companies fail.
Their failure always started the same way that LinkedIn's (LNKD) stock is falling.
Breathtaking.
It's got horrendous pin action, taking down even companies that we know are doing well, like Facebook (FB). (Facebook is part of TheStreet's Action Alerts PLUS portfolio.)
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But here's the issue. LinkedIn has nothing in common with that period. It is immensely profitable. It earned $1.61 a share in 2013, $2.02 in 2014, $2.84 in 2015, and even after the so-called horrendous guidance, it is estimated to earn $3.30 this year, $4.35 next year and $5.80 in 2018.
Now here's the problem. Let's say it is actually only going to do $3 in 2016, which I think is lowballing it. What do you pay for a company with earnings that are still growing but slowing?
I think it is very hard to pay much more than you would for the average stock, which is 17x earnings. That produces a price of $51.
By that measure, it would be cut in half.
But then you have to ask is this amazing, unique franchise only worth $7 billion?
That's what it would fall to.
That's too small a market cap. There are too many companies that would want this business at those prices.
Plus, this market has a nasty habit of taking a stock down and then marking it at the lowest point as brokers can say, "Look, I got you out at a price that on average is nicely above where it went out."
So no one can bottom-fish today.
That leaves the stock in total limbo. No one who downgraded it today is going to upgrade it Monday.
There will be supporters. But they will be timid.
Let's put it all together: You have a stock in free-fall where sellers will take it as low as they want because they don't have any way to value it anymore. It had already screwed up once. They are done with it.
However, it is nowhere close to where it represented value.
That means you are flying blind.
I think the last price today and the first price Monday might be intriguing.
Nevertheless, broken growth stories tend, in this market, to stay broken until the next quarter is reported and it shows improvement.
That's a long time to wait.
Yet it is the pattern we have seen of momentum turning to value stocks. It's wider and deeper than the River Jordan and we still have no idea if there is milk and honey on the other side.
