The projected year of reckoning for tech stocks manifested itself on Friday when job-based social media company LinkedIn saw its shares plunge over 40 per cent, wiping $10 billion off its value in just one day.
LinkedIn earnings per share were more than 25 per cent lower than expected. Despite the company announcing that sales for the current quarter would be six per cent lower than expected ($820m on expectations of $867m), the news sent the shares into freefall.
However despite what looks like a catastrophic drop in value, the company is in good shape and has a pretty solid foundation of over 400 million paying and non-paying users. The problem that LinkedIn had was its shares were grossly overvalued with them running at more than 50 times its earnings. To put that into perspective that is nearly double what similar tech stocks are valued at – and they are also overvalued, the S&P average is 20 times earnings. So Linkedin was overvalued by two-and-a-half times.
In terms of growth, LinkedIn was running at 35 per cent but that has slowed to around 20 per cent, which led to its sudden revaluation by the stock market. LinkedIn growth has stalled despite the determined efforts by the company to make the site more of a social media site for professionals rather than just a search for jobs.
Presently, LinkedIn is sitting at 33 times earnings so may not be out of the wood yet as it could easily drop further if next quarter's revenue and growth don’t pick up.