Analyze Why LNKD LinkedIn Fell 25% on April 25, 2015
On April 25, 2015, the stock price of LNKD, the publicly traded ticker symbol for LinkedIn, plummeted by 25%. Despite meeting expectations for Q1 earnings, the company's outlook for Q2 was disappointing. In this article, we will delve into the reasons behind this significant drop in stock price, scrutinizing the impact of faulty expectations and market fundamentals.
Meeting Q1 Earnings but Falling Short on Q2 Outlook
LinkedIn's financial performance during the first quarter met the market's expectations. However, the anticipated earnings for the second quarter were lower than anticipated, with a projected 28 cents per share, which is approximately half of the Q1 earnings and one-third of what analysts had expected. This shortfall in the projected earnings outlook led to a significant drop in the stock price.
The Role of Market Fundamentals and Hype
Even though there has been significant hype about changes in valuation methods for high-tech companies, economic fundamentals still play a crucial role in determining stock value. With a projected price-to-earnings (PE) ratio of over 100, the stock appears to be significantly overvalued compared to other tech stocks. For instance, Apple (AAPL) has a PE ratio of 16, and even Facebook (FB) has a lower PE ratio of 79. This overvaluation is concerning, as a lower PE ratio generally means more earnings per dollar spent to purchase shares.
The Supply and Demand Factor
The dramatic fall in LNKD's stock price can also be attributed to the supply and demand dynamics in the market. More shares were sold than bought, indicating an excess of supply over demand, which naturally led to a decrease in the share price.
Exploring the Reasons Behind the Shareholder Selling
Though the reasons why shareholders chose to sell their shares are not clearly documented, several plausible explanations can be considered:
Needing Cash for Immediate Needs
Shareholders may have sold their shares to generate cash for urgent financial needs.
Displeasure with Future Prospects
Some shareholders might have been dissatisfied with LinkedIn's future growth prospects, leading them to sell their shares.
Opposition to Management Decisions
Disagreement with the company's management or strategic decisions could have prompted some shareholders to sell.
Seeking Better Investment Opportunities
Moving capital to more promising investments could also be a factor, as shareholders often seek the best return on their investments.
Who knows the exact reasons behind individual decisions? One thing is clear: sellers may have had different motivations, which align with many common scenarios in the stock market.
Conclusion
In conclusion, the significant drop in LNKD LinkedIn's stock price on April 25, 2015, can be attributed to both the shortfall in the second-quarter earnings outlook and the market fundamentals. Economic indicators, particularly the PE ratio, suggest that LinkedIn is overvalued compared to its peers. Additionally, the excess supply of shares in the market due to more selling than buying contributed to the price fall.
Understanding these underlying factors can provide valuable insights into the stock market's behavior and help investors make informed decisions.