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LinkedIn (LNKD) Downgraded to Strong Sell Despite Solid Q4

On Apr 13, 2016, Zacks Investment Research downgraded LinkedIn Corporation LNKD to a Zacks Rank #5 (Strong Sell). Going by the Zacks model, companies with a Zacks Rank #5 are likely to underperform the broader market.

Most of the estimates for this social media company have been moving downward since it announced the fourth-quarter of fiscal 2015 results on Feb 4.

Why the Downgrade?

LinkedIn, the online professional network, which allows members to create, manage, and share their professional identity in the virtual world, has been in trouble ever since it reported the fourth-quarter results. Though earnings and revenues topped the respective Zacks Consensus Estimate, the weaker-than-expected 2016 guidance left investors panic stricken, and dragged down the shares by 50% before some improvement could be seen.

For the first quarter, LinkedIn expects revenues around $820 million, much lower than the Zacks Consensus Estimate of $829 million. The company expects full-year 2016 revenues in the range of $3.60 billion to $3.65 billion (mid-point $3.625 billion). The guidance was lower than the Zacks Consensus Estimate of $3.688 billion.

The company projects first-quarter earnings per share to be 55 cents, while for the full year, it is estimated in the band of $3.05 to $3.20. The Zacks Consensus Estimate at the time of issuing the guidance was pegged at 72 cents and $3.73 per share, respectively.

The dismal outlook triggered the downward estimate revision momentum for both 2016 and 2017. Over the last 90 days, estimates for 2016 declined from earnings of 75 cents to a loss of 26 cents while for 2017, estimates plunged to 81 cents from $3.02.

The troubles plaguing LinkedIn include a combination of internal and external factors. We believe that there is a possibility that Facebook FB will pose a bigger challenge in the near future in the race to gain supremacy in the professional networking space.

Moreover, companies like Alphabet Inc. GOOGL and Microsoft MSFT have been regularly introducing services. These could bring about a rapid change in the scenario and intensify the competition, thereby affecting LinkedIn’s growth strategy.

Security is another major concern for LinkedIn. If, due to some external attack, security measures are compromised, the company will lose its reputation as well as memberships and ultimately the platform’s popularity. Like any other social networking company, LinkedIn has been under the purview of the federal investigating agencies as allegations of data hacking cropped up.

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