Tech investors get painful reality check

Published Mon, Feb 8 20162:57 PM ESTUpdated Tue, Feb 9 20165:41 AM EST

Breakingviews

By Robert Cyran

Tech investors are bearing up for a painful reality check. LinkedIn 's market value fell by 44 percent on Friday after executives said they expect its top line to grow by some 20 percent this year–a third lower than estimates. Rivals were also hit. Worsening prospects are finally prompting shareholders to question the rosy adjusted-earnings scenarios often touted for tech companies. With valuations still high, more red ink lies ahead. Read More How to trade the tech sell-off LinkedIn is the dominant social network for professionals. It may be annoying to use, but it's hard to see what will supplant it anytime soon. That surety as well as fast growth encouraged investors to indulge in dreamy visions of future riches even as the company was losing money. Backers rationalized their hopes by stripping out various costs such as equity compensation to come up with an adjusted number for profit. It's a common trick used by and for growth companies–especially in Silicon Valley–to predict fast growth and rising margins that justify lofty valuations. Shareholders are now switching from worrying about missing out to fearing they will lose money. Tech is not the only speculative, cash-burning sector to suffer. The NASDAQ biotech index has lost a quarter of its value since the start of the year. Energy firms that leveraged up to develop shale fields face restructuring and bankruptcy. LinkedIn adds to reasons for investors to re-examine tech. More from Breakingviews : Bank stock rout's chief suspect: central banks Big data firm Tableau Software lost nearly half its market value on Friday. Workday fell 16 percent and Salesforce.com fell 13 percent. The carnage continued in early Monday morning trading. More solid firms are vulnerable to the chill in the air, too, though to a much lesser extent. Facebook 's market value is down a smidge this year, even though its earnings are real and growing quickly. The pain probably isn't over, though-especially for private market startups with absurd valuations and firms with nebulous earnings on standard accounting metrics. LinkedIn, for example, still trades at 33 times its version of adjusted estimated 2016 earnings. Using the simple, old-fashioned method, it will most assuredly lose money. There are still plenty of tech dreams that can turn nightmarish. For more independent commentary and analysisfrom Reuters Breakingviews, visit breakingviews.com

LinkedIn signage is displayed outside the company's headquarters in Mountain View, California.

David Paul Morris | Bloomberg | Getty Images

Tech investors are bearing up for a painful reality check.

LinkedIn's market value fell by 44 percent on Friday after executives said they expect its top line to grow by some 20 percent this year–a third lower than estimates. Rivals were also hit. Worsening prospects are finally prompting shareholders to question the rosy adjusted-earnings scenarios often touted for tech companies. With valuations still high, more red ink lies ahead.