LinkedIn $11B Stock Loss: Job

Crisis in Silicon Valley

Stephen Lam / Getty

byCHRISS W. STREET
7 Feb 2016
Newport Beach, CA

323

LinkedIns epic $11.1 billion single-day-stock-plunge on February 5

represents the proverbial canary dying in Silicon Valleys gold mine
as tech jobs are vaporized.
LinkedIn (NYSE:LNKD) wasfoundedin the heart of Silicon Valley. Its CEO, Jeff Weiner is from PayPal;
its founder, Reid Hoffman, is from Yahoo! Inc.; its venture capital came from Sequoia Capitalall storied
Silicon Valley titans.
The companys Talent Solutions began as a bulletin board in 2002 for the thousands of out-of-work
Silicon Valley engineers and tech workers after the Dot-Com Bust. It quickly morphed into the premier
national online job posting and resume distributing site for tech workers.
Driven by the bidding war for Silicon Valley technical talent over the last 6 years, LinkedIns Recruiter
platform has grown at twice the national 30 percent annual growth of new tech jobs openings over the last
three years.

The Bureau of Labor Statistics reported that by September 2015, the monthly national Job Openings and
Labor Turnover report hit an all-time-record high with5.4 million in job openings. Tech stafng demand
dominated recruiting interest, with the national median annual salaries for software engineers jumping to
$105,000, network engineers to $87,903, and research scientists to $85,000,accordingto the Glassdoor
blog.
Themedian annual salariesfor tech positions in Silicon Valley at the time averaged a 35 to 38 percent
premium over national wages,accordingto Robert Haft corporate recruiters. More importantly, for
Silicon Valley venture capital backed start-ups hoping eventually to strike it rich in lucrative initial public
offerings (IPOs), enticing skilled tech workers to jump from established companies cost another 20
percent wage premium and big stock options.
With LinkedIn at the center of theSilicon Valley gold rush, the companys stock rose about 150 percent
from from early 2013 to peak out in late November 2015 at a price of $250 per share, valuaing the
company with essentially no assets at a capitalization of $32.8 billion.
But just two weeks later, as Breitbart Newsnoted,the IPO parade stopped.Despite the U.S. IPO market
remaining strong in 2015, we warned that the tech sector was in the late stages of what the Gartner Group
refers to as a Hype Cycle, similar to the period of shriveling of tech sector IPOs in 1999 and 2007, just
before tech stocks tanked by over 50 percent.
Of the total of 169 IPOs that raised $29.9 billion in 2015, the tech sectors percentage of deals was cut in
half, to 14 percent. The 23 tech companies that were fortunate enough to go public raised a paltry $4.2
billion. About 60 percent of tech new issues 2015 recorded negative returns,ledby Etsy Internet B2B
supplier, which fell by 72 percent.
The LinkedInearnings callafter the close of trading on Feb. 4 started off with an upbeat report of beating
analysts estimates of sale revenue and prot. But then LinkedIn shocked Wall Street by indicating its
growth rate would be cut in half to about 20 percent for the year.
The stock collapsed the next day by over 44 percent, from $192 to $107. Based on a traditional securities
analysis of valuation of the companys future cash ows, Seeking AlphasSophocles Sophocleousvalues
LinkedIn at about $75. That would imply that the stock could crash by about another $9 billion.
Despite the fact that Facebook and Twitterstill boast higher use among tech job seekersthan LinkedIn,
investors were so blinded by rumors of Silicon Valley companies trying to poach their competitors
tech talent at wildly inated wages and benets that they bid-up LinkedIn as a concept play that far
overshot the companys fair valuation.
LinkedIn also has huge liabilities hidden in the companys SEC ling footnotes, including over $1 billion
inoutstanding employee stock optionsthat dilute the value of existing shares, and$620 millionin lease
obligations. Together, these liabilities represent roughly 150 percent of LinkedIns reported net assets.
Managements forecast that LinkedIns Talent Solutions growth is slowing fast was conrmed when
Breitbart Newsreportedon February 4 that U.S. corporate layoffs in January surged 218 percent from
the prior month, to 75,114. That was the highest level of after-Christmas downsizing since the depths of
the 2009 Global Financial Crisis.

But more disturbing for Silicon Valley cheerleaders is the fact that the computer and telecommunications
sectors, which had been in expansion mode almost every month for the last three years, were the third and
fourth largest sectors for corporate layoffs, with 14,374 in job cuts.

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