SAN FRANCISCO — LinkedIn’s woes grew Wednesday after Morgan Stanley analyst Brian Nowak cut his rating on the company’s shares to neutral and slashed his target price on the stock to $125 a share from $190.
In effect, Nowak went from being a cheerleader for the online professional services and networking company to just shrugging his shoulders about its prospects.
“We were wrong,” Nowak said, in a research note explaining his views on LinkedIn. “We have overestimated LinkedIn’s ability to grow its platform and underestimated the investment needed to grow.”
Fueled by Nowak’s opinion, investors sent LinkedIn’s shares down by 5 percent to close Wednesday at $109.80.
Nowak said LinkedIn wasn’t showing much for him to retain the faith he previously had in the company’s ability to build and make money from its four main businesses: Talent Solutions, Marketing Solutions, Premium Subscriptions and Lynda, an online educational company that LinkedIn acquired in April for $1.5 billion.
Among the reasons Nowak gave for his new take on LinkedIn is evidence that the company is seeing a slowdown in growth among large businesses, and having difficulty retaining those customers it already has. Nowak said this has put LinkedIn in a position where it will have to ramp up investments — specifically in its Talent Solutions business — to improve its standing with larger customers, and that such a move will end up putting pressure on the company’s earnings potential.
“LinkedIn is finding it needs to increase its investment spending to drive forward growth,” Nowak said. “In our view, this speaks to the rising cost of growth, increased execution uncertainty, and margin pressure to come.”
While Nowak was largely down on LinkedIn’s prospects, the view of Piper Jaffray analyst Gene Munster pointed to how Wall Street is not united in its analysis.
Munster said that despite the concerns about LinkedIn’s Talent Solutions business, the company still has more than 300 million user profiles that its customers can draw up for hiring and selling services, and that LinkedIn usually errs on the side of being conservative when it comes to predicting growth for that business.
“LinkedIn remains relatively unchallenged in its Talent Solutions segment,” Munster said, who noted that when LinkedIn gives its first-quarter results, it wouldn’t be surprising to see the company report Talent Solutions growth that exceeds the company’s earlier estimate of a 20 percent increase this year.
Wednesday’s bad news added to what has been more than a month of discontent around LinkedIn since it gave a disappointing first-quarter outlook on Feb. 4. On that day, LinkedIn said it expected to earn 55 cents a share, excluding one-time items, on revenue of $820 million for its first quarter, which ends March 31. That forecast was far below the estimates of analysts surveyed by Thomson Reuters, who were looking for LinkedIn to earn 74 cents a share on $866 million in sales for the quarter.
The day after giving its forecast, investors drove down LinkedIn’s stock by almost 44 percent, and wiped out $10 billion of the company’s market value.
Contact Rex Crum at 408-278-3415. Follow him at Twitter.com/rexcrum.
