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LinkedIn no longer worthy of premium rating, brokers say

The Lead Accelerator platform is to be phased out as it has proved too costly

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In recent times, the company has pumped funds into expansion by acquiring firms and hiring sales staff

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An otherwise promising fourth-quarter report for social networking site LinkedIn (NYSE:LNKD) was overshadowed by a much weaker than anticipated forecast for 2016.

Shares in the company sank 29% in after-hours trading Thursday as the company issued disappointing guidance for 2016 despite fourth revenue coming in slightly above expectations.

The share price dropped to $137.11, the lowest level since February 2013 and 50% below its record high in February last year. The after-hours slump wiped almost $7bln from its market value. It reported a loss of $8.4mln for the final quarter.

The poor forecast reflects a slowdown in its online sales business, overseas economic pressure and the decision to shelve a key advertising product launched last year.

Facing competition from Google, the online professional network reported the slowest rise in two years for fourth quarter advertising revenue. In a recalibration of its advertising strategy, LinkedIn plans to drop its Lead Accelerator platform by the first half of 2016 as it required more resources than expected. Dropping Lead Accelerator, one of LinkedIn’s key advertising products, is forecast to hit revenue by at least $50mln.

LinkedIn intends to increasingly narrow its focus in 2016 to "high-value, high-impact initiatives”, said chief executive Jeff Weiner, as it prunes away unexpectedly costly side products. Lead Accelerator will make way for sponsored advertising content, currently LinkedIn’s most profitable advertising product.

In recent times, the company has pumped funds into expansion by acquiring firms and hiring sales staff with a focus on growing in markets outside the US, such as China.

Finance director Steve Sordello said the company was facing increased pressure in Europe, Middle East, Far East and Africa due to “current global conditions”.

Nonetheless, LinkedIn reached 414 million members at the end of last year.

The online professional network has seen steady revenue growth over the last five years but large stock grants awarded to employees often see it report a net loss.

Expectations for the current period severely disappointed Wall Street. LinkedIn forecast profits of 55 cents per share for the first quarter of 2016, well below analyst estimates of 74 cents.

The revenue forecast of $820mln is also well below expectations.

Once trading kicked off on Friday, the shares plummeted, losing more than two-fifths of their value – the biggest daily fall since the company floated.

Analysts rushes to their computers to update their spreadsheets and come up with new forecasts and price targets.

Monness Crespi Hardt downgraded the stock to 'neutral' from 'buy' while RBC Capital Markets was savage in its reaction, practically halving its target price to $156 from $300 as it downgraded the stock to 'sector perform' from 'outperform'.

A common theme among brokers was that the tech star had lost its right to trade at a premium.

“With a lower growth profile, we believe that LinkedIn should not enjoy the premium multiple it has grown accustomed to. For now, we are moving to the sidelines,” revealed Mizuho Securities, which cut its price target to $150 from $258 and downgraded its rating on the stock to 'neutral' from 'buy'.

Wedbush, meanwhile, lowered its 12 month price target from $232 down to $200.

“The company has historically been quite conservative with its guidance, and almost routinely delivers upside to guidance and consensus; on the other hand, recent market volatility suggests that investors lack the patience to play the guidance game and wait for companies to exceed low-balled guidance,” said analysts at Wedbush.

LinkedIn shares traded at around $110.69 towards the end of the lunchtime session.

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