Why stock prices can fall 25 percent suddenly?

The stock that we are discussing today is that of LinkedIn. It is a listed entity and recently, it issued a second quarter earnings guide which was way below that expected by analysts. It said it expected only 28 cents (US$) per share  while the market survey of analysts by Thomson Reuters has expected 74 cents. The yearly earnings is also very far from that expected by analysts; US$1.90 versus US$3.03. Now, you understand why the stock price has fallen so much within one day? For the past 12 months, shares of LinkedIn were up 64 percent but within one day, it has fallen 25 percent. Looking closer, LinkedIn posted a first-quarter LOSS of US$42.4 million which was 3 times higher than the loss one year earlier. This loss was also attributed to stock-based compensation and other items.
Yes, you may want to ask why a company suffering losses still issue stock-based compensation which eats into its profits? In America, this is common. Perhaps it’s just harder to attract good people without these stock-based compensation. You may also want to ask if the stock has been suffering losses from one year ago and the stock-based compensation has been announced earlier, why did the share price still went up 64 percent within the past one year? It’s all about expectations. The investors believed that the company would perform very well, thus they bought into the growth story and when this did not happen, many chose to dump the stock.
Oh yeah, last but not least, despite all these current circumstances, LinkedIn has announced the acquisition of lynda.com for US$1.5 billion. It’s CEO Jeff Weiner said that the first quarter “was a solid quarter.” The company also announced that its membership grew to more than 350 million and this is nearly 17 percent higher than a year earlier.
It’s very important NOT to buy stocks because of very huge expectations. If you are working as a sales person, you may understand that many times, a growth of 50 percent is already considered crazy and some sales people given a 30 percent target increase may just resign. Yes, for internet or online business, the growth may easily exceed the usual traditional business but it is also as likely not to hit whatever is expected unlike the traditional businesses which may continue to grow even if the growth may be slower these days. Also, for stocks many times I prefer to buy a business which I understand. LinkedIn’s business I have to admit I do not understand enough.
written on 2 May 2015
next suggested article: Stock down? Stock up!


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