Failed endorsement

LinkedIn shareholders not endorsing lower growth

LinkedIn shareholders aren't endorsing lower growth. The social network for jobseekers run by Jeff Weiner lost as much as $7 billion in market value after it said 2015 revenue and earnings would be lower than expected. Investors assumed its niche assured fast and steady expansion, allowing them to rationalize a nose-bleed valuation. Reality is biting.

LinkedIn may be dorky, but enough jobseekers and employers congregate on the site to make it extremely useful. It's steadily attracting more users - especially overseas - and getting them to look at more pages. And this attracts even more employers, triggering a virtuous circle.

That's still the case, but the revolution of the circle is steadily slowing. The first quarter's growth was still impressive at 35 per cent compared to last year. But the company was growing at about 100 per cent a year three years ago. The real problem is that this year will be slower than investors expected - and the fact LinkedIn was worth a whopping $32 billion prior to the news.

It seems ridiculous to think investors wiped up to $7 billion of value from LinkedIn in after-market trading because the company predicts revenue, at $2.9 billion this year, will be about $80 million less than originally projected. But LinkedIn also says it will earn only $1.90 a share according to the way the company defines earnings - that's almost 40 per cent less than Wall Street's estimate.

The best way to understand why investors freaked out is to consider its valuation. Even after its recent fall, LinkedIn is trading at about 100 times its variation of estimated earnings, while according to conventional accounting it's actually losing money. Without the assurance of rapid growth, it's hard to ignore LinkedIn's ridiculously stretched valuation.