Tech stocks have not had a good 2014. A lot of momentum stocks that more than doubled in value in 2013 have seen steep corrections in early 2014 on both profit taking and greater concerns that systemic risks were making these high P/E multiple stocks too risky to hold.
With the first quarter’s earning season underway, the fundamental value of tech stocks in the new year is becoming clearer. The story with each ticker is beginning to become more unique and distinct, meaning that tech stock investors need to be more careful and choosy when investing—but if they do, they can easily outperform the market.
Netflix (NFLX) reported inline revenue that grew 25% year-over-year and a 5 cent EPS beat, which caused the stock to rise slightly but quickly correct afterwards. The stock’s growth story remains intact, but valuation remains a concern here.
Facebook (FB) reported another huge year-over-year growth, with 71% revenue growth on a year-over-year basis with an unusually low seasonal impact on the company’s revenues, despite the seasonality of the company’s monetization base. The stock had a modest rise in after-hour trading on the news.
More mature stocks have shown some strength as well. Apple (AAPL) beat with EPS of $11.62 that was over 10% above estimates, and revenues that beat by over $2 billion with gross margins rising in the next quarter to the 37-38% range. The company also announced a higher stock buyback and a 7:1 stock split, causing the stock to halt trading after the release and then to go up over 8% after hours. While criticism of the company’s lackluster product development has caused the stock to fall in recent weeks, management’s financial response is likely to erase almost all of that concern.
Google (GOOG) disappointed for the opposite reason AAPL popped. With 19% year-over-year revenue growth that missed expectations, the stock wasn’t destined for a bull run, but the EPS miss of 15 cents was a real concern for investors who believe the company’s huge cash hoard, lack of dividend, and acquisition spree were not good for shareholders. Opex and Capex were both well above expectations, helping the stock to fall nearly 3% in after hours trading and to fall around 5% since the earnings release last week.
Many more momentum stocks are set to report earnings in the next few weeks, but the movement of the tech stocks that have reported so far is a good indicator of what sorts of questions investors should ask before allocating capital to these firms. How are expenses in the more mature tech companies trending, and how is revenue growth trending in the newer names? How do these relate to expectations? What bout these tech companies’ industries is changing, and how are they positioned to profit?