Cramer: What the LinkedIn disaster means to you

While the market on Monday was a total bloodbath, Jim Cramer doesn’t want investors to forget that Friday was terrible, too. Friday’s carnage all stemmed from the horrific forecasts of high growth technology stocks LinkedIn and Tableau Software, which caused anything related to mobile, social and cloud to go into a tailspin.

“The pin action from these two quarters was so alarming that I think it is very important for us to understand what went wrong here,” the “Mad Money” host said.

LinkedIn is the social network for professionals that makes its money through advertisements, selling premium subscriptions to users, and helping recruiters find candidates for open jobs.

When Cramer only looked at its headline numbers from the last quarter, LinkedIn’s results seemed pretty solid. But it was the guidance that was scary. Sales and earnings forecasts for 2016 were significantly lower than what Wall Street was expecting. This prompted the company to lose $11 billion in market capitalization in a single session.

A LinkedIn Corp. banner hangs on the front of the New York Stock Exchange in New York, U.S., on Thursday, May 19, 2011.

Michael Nagle | Bloomberg | Getty Images
A LinkedIn Corp. banner hangs on the front of the New York Stock Exchange in New York, U.S., on Thursday, May 19, 2011.

The reasoning behind LinkedIn’s weak forecast was that management stated that they see serious weakness in Asia Pacific, Europe, the Middle East and Africa. That was a major departure from what other companies in this group said.

LinkedIn also predicted continuous weakness, which was scary because it gets 40 percent of its sales outside of the U.S. Suddenly investors understood how vulnerable LinkedIn is to macro-economic weakness. Less hiring means less demand for its core recruitment services, and that totally changed the way the stock was viewed.

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“There is real worth here, but the firm’s credibility is most likely shot until we see a good quarter, and we know that is not going to happen for another three months because they just reported,” Cramer said.

As for Tableau, its guidance was also a disaster for next quarter and the 2016 fiscal year. Analysts quickly downgraded the stock, and it plunged 49 percent Friday.

On the conference call, management acknowledged that cheap low-end analytics products were playing a role in the company’s slower growth. This led many investors to realize the space could be more crowded and difficult.

Additionally, Tableau had a sharp deceleration in its core licensing revenue. Management said customers were being more cautious with spending, and existing customers aren’t giving more business as fast as they used to.

Cramer considers the real problem with these two stocks to be the reverberations they caused to the rest of the group. Stocks like Splunkwere obliterated simply due to guilt by association.

“These other companies may be doing just fine, but until we are sure the forced selling by troubled hedge funds is over, I think you need to avoid both groups. Just too risky,” Cramer said.

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