Shares of professional networking site LinkedIn (NYSE:LNKD) crashed a massive 40% on the first day of trading after the company delivered Q4 2015 results. LinkedIn's results topped analyst expectations but the company issued a very weak Q1 2016 guidance. LinkedIn reported fourth-quarter revenue of $861.9M, good for 34% Y/Y growth, easily exceeding LinkedIn's guidance of $845M-$850M, as well as Wall Street’s consensus figure of $857.59M. LinkedIn reported non-GAAP EPS $0.94, way higher than its own guidance of $0.74, and Wall Street’s consensus of $0.78.

LinkedIn Stock 5-Day Returns

Source: CNN Money

It was, however, another quarter of losses for LinkedIn. The company reported GAAP diluted EPS of $-0.06 compared to $-0.02 posted during last year’s comparable quarter.

But that’s not what spooked investors. It was LinkedIn’s Q1 2016 and full year 2016 guidance. LinkedIn said that it expects Q1 revenue of $820M, well below Wall Street’s consensus of $866.7M. For the full year, LinkedIn said that it expects revenue of $3.6B-$3.65B, again well below Wall Street’s consensus of $3.91B. LinkedIn’s non-GAAP EPS projection of $3.05-$3.20 also compares poorly with the Street’s consensus estimate of $3.67.

LinkedIn’s Ad Business Could Have Fallen Victim To Facebook

Looking at LinkedIn’s performance by segment, it becomes clear why the market reacted so strongly to LinkedIn’s guidance, despite the fact that the company had just topped estimates. LinkedIn’s Talent Solutions, the company’s largest segment, grew revenue by 45% Y/Y to $535M. That was a slowdown compared to the previous quarter but still good enough nevertheless.

Meanwhile, LinkedIn’s Premium Subscriptions grew revenue by 19% to $144M, while LinkedIn’s ad business, Marketing Solutions, grew revenue by 20% to $183M.

LinkedIn’s ad business has been the focal point of many bear theses, and the company’s most recent quarter seems to confirm investors’ worst fear that the ad business is getting walloped by Facebook (NASDAQ:FB). Just a year ago, LinkedIn’s Marketing Solutions was the company’s fastest-growing revenue segment. The one that most investors counted on to offset its slowing Talent Solutions business. During Q4 2014, LinkedIn’s Marketing Solutions posted growth of 56% compared to 41% growth in Talent Solutions and 38% growth in Premium Subscriptions.

Fast-forward to one year later and LinkedIn’s ad business is now growing at less than half the clip it did just 12 months ago. During the third quarter of 2015, Marketing Solutions grew 28%, which implies that the slowdown has been ongoing for some time and pretty dramatic.

So what’s happening here? There is no hard evidence to prove this yet, but it’s hard not to suspect that the resurgence in Facebook’s ad business is primarily to blame for LinkedIn’s ad weakness. This is also something I discussed in my LinkedIn Q4 2015 earnings preview. During Q4 2014 Facebook’s ad revenue grew 53% but then went downhill from there. By Q2 2015 the segment’s growth had plunged to just 43%. The business started recovering during Q3 2015 when it posted 45% growth before blasting off in Q4 2015 when it recorded growth of 57% to $5.64B.

Facebook seems to be benefiting in this era of programmatic advertising primarily due to the fact that it embraced the technology earlier than its peers, and also due to its much bigger userbase. Programmatic ads are automated ads that use a technology that tracks user preferences on site and later uses this information to display relevant ads when users visit other sites. Programmatic advertising has literally taken over traditional display advertising, with eMarketer estimating that programmatic ads made up 49% of display ads in 2014, and will constitute 72% of all display ads by 2017

Source: eMarketer

Marketers love programmatic ads because they yield better ROIs at lower CPM rates than traditional display ads. Facebook embraced programmatic ads a couple of years ago when many publishers were still in denial about the future of the technology. The company even provided marketers with tools that made it easier for them to implement these popular ads.

Even though other sites such as LinkedIn have joined the programmatic ads bandwagon, they are lagging behind Facebook primarily because other things held constant, Facebook’s much larger userbase allows marketers to realize better ROIs on their ad spend.

Investor Takeaway

LinkedIn stock has been hammered badly and could remain dead money in the coming quarters unless the company can find a way to entice marketers and revive its slowing ad business. As things currently stand, Facebook appears to be calling the shots in the ad space and LinkedIn is merely playing catch up.