LinkedIn (LNKD) has officially entered the penalty box. Thursday's earnings release and conference call were disastrous. As of this writing, LinkedIn shares have fallen over 40% in Friday's trading, erasing an astounding $8.9 billion in market value.
LinkedIn's fourth-quarter results may have looked fine at the EPS level, but on two key metrics -- unique visiting members and member page views -- LNKD actually reported zero sequential growth from the third quarter's figure.
Worse, guidance for 2016 was below analyst expectations on all fronts. LNKD guided to first quarter 2016 EPS of 55 cents and revenue of $820 million vs. analyst consensus of 74 cents and $867 million. LinkedIn's full-year guidance was just as disappointing, as management forecast adjusted EPS of $3.05 to $3.20 vs. Street consensus of $3.67 on revenues of about $3.6 billion, also well below Street consensus of $3.8 billion.
Finally, puzzlingly, LinkedIn management announced it was phasing out the company's lead accelerator product, which had been acquired when the company bought Bizo in July 2014.
Analysts hated that move, but they still are forecasting much higher levels for LinkedIn stock (all the price targets here, as well as the consensus data, are sourced from MarketWatch).
JPMorgan downgraded the stock to Neutral, but its new, much-lower price target of $186 still represents 63% upside from current levels.
The other banks did the same. Credit Suisse lowered its price target by $100 a share to $230, but that would be a double from current levels. Goldman showed similar analysis, slashing its price target to $200, but maintaining a Buy rating because, optically, a stock that has 80% upside to an analyst's target price probably should be a buy.
But that's where the sell side gets it wrong. I was a sell-side analyst for 11 years and I learned to respect the penalty box. One's ivory-tower, Excel-generated price targets just do not matter in a market where the stock in question is being jettisoned.
So when there's a blow-up in the magnitude of LinkedIn's, as an investor -- as opposed to a sell-side analyst -- there's just no benefit to showing the patience of Job.
This is especially true on high-multiple momentum stocks. Even after today's 40% implosion, LinkedIn shares are still trading at 36.5x the midpoint of management's new, lower guidance for 2016 EPS. Is that cheap? No, of course not, it's about 2.5x the current multiple afforded the S&P 500.
As shown on page 5 of the company's 4Q earnings slide presentation, LinkedIn's revenue growth rate chart looks like a ski slope. Some of that is simple mathematics, as companies can't grow at 40% forever, but really, any signs of slowing growth in a growth stock are stock-killers.
So, LinkedIn's in the penalty box. As shown last year with Twitter's (TWTR) disastrous first-quarter results, that stay typically lasts quarters or years, not days or weeks. Twitter is currently trading at $16 and was in the high $40s going into that report eight months ago. It's a lasting thing. (Twitter is part of TheStreet's Action Alerts PLUS portfolio.)
That's why sell-side price targets are not reliable buy-sell signals. In 11 years on the sell-side, I may have had buy-side clients question me about my price targets five times, but I doubt it was even that many.
Buy-side analysts value the sell side for industry analysis, management contacts and detailed earnings modeling, not price targets. In literally thousands of meetings with buy-siders, I never once had someone say, "The stock's trading at $40 and your price target is $80, so I'm going to run out of this room and buy it for 100% upside."
Professionals don't do it that way, nor should you. Once a stock goes into the penalty box, it becomes radioactive to many types of investors, and that, often, is a self-fulfilling prophecy.