Will Today’s Winners Be Tomorrow’s Losers?

Apple…Amazon…Facebook…Google…Microsoft…Netflix…and Yahoo. They are among the largest, most dominant and most exciting technology-driven companies in the stock market. Their shares all have soared at various points, but competition in global technology is fierce and success is never guaranteed.

To help you decide whether today’s winners will be tomorrow’s dinosaurs, Bottom Line/Personal asked three of the nation’s leading tech-stock strategists whether these seven tech giants still are great investments…

INTERNET GIANTS
Rick Summer, CFA, CPA

Google (GOOG). When Google’s online services—including Gmail and Google Search—all crashed for five minutes last August, global Internet traffic dropped by a staggering 40%, underscoring Google’s enormous popularity with users and advertisers. Google generated $14.9 billion in revenue for the third quarter of 2013, a 12% increase over the same period in 2012. But Google’s big challenge is that ventures such as its video-sharing Web site YouTube will be less profitable than its lucrative core search business.

Verdict: Up 58% in 2013, Google stock is somewhat overvalued. But the long-term positives, including the world’s continuing shift to digital advertising, outweigh the uncertainties. Investors should consider buying on big pullbacks. My estimate of Google’s fair market value is $875 per share. Recent share price: $1,109.46.

 

Facebook (FB). This stock plunged soon after its initial public offering in 2012 because investors were skeptical that the free social-networking site could “monetize” its users by attracting advertisers. Then Facebook stock made a stunning comeback, rising more than 200% since September 2012. Reason: Revenue growth has taken off, especially from ads seen by people who use Facebook on their mobile phones. The company offers digital advertisers something unique—an incredibly rich, detailed database that it builds by snooping on its site’s users and that helps advertisers target users more effectively. A big challenge, however, is for Facebook to attract new—and young—waves of users who tend to want only the latest, “coolest” sites and apps. Facebook will never again be one of those.

Verdict: Facebook will continue to be a volatile stock as investors gauge whether advertisers are willing to pay increasingly higher rates…and whether newer competitors can gain traction. A significant shortfall in revenue growth could push down the very overvalued stock by 25% to 50%. It’s worth hanging on for the ride if you are a very patient long-term investor, but don’t buy it above my fair value estimate of $36 per share. Recent share price: $53.71.

Yahoo (YHOO). Yahoo’s stock has underperformed the Standard & Poor’s 500 stock index over the past 10 years. Revenue from advertisers keeps declining because Yahoo’s online content and tools aren’t nearly as innovative and addictive as what Facebook, Google and Twitter offer. Despite this, the stock shot up by 103% last year, thanks in part to a short-term catalyst. The catalyst: Yahoo stands to receive a cash windfall because it owns 24% of the Chinese online retailer Alibaba, which plans to go public.

Verdict: Steer clear. Yahoo’s latest CEO, former Google executive Marissa Mayer, has bought some flashy startups, including Tumblr. But neither the acquisitions nor Alibaba’s cash infusion will change the long-term competitive outlook. Recent share price: $40.20.

 

HARDWARE & SOFTWARE
Charles Sizemore, CFA

Apple (AAPL). Over the past year, Apple’s profits dropped and revenue was flat. The market for mobile phones in the US and developed nations has matured, and Samsung has caught up. Apple needs upcoming products, such as the much-talked about iWatch and iTV, to wow consumers.

Verdict: Apple can’t continue to maintain the astonishing 50% average annualized return that the stock achieved over the past decade. But the stock, which rose by just 7.6% in 2013, currently is undervalued and still is a promising core holding for long-term investors. Recent share price: $554.52.

Microsoft (MSFT). Microsoft stock stagnated for more than a decade until investors realized that the shares had become cheap. But the stock rose by more than 43% last year, and it is likely to match the returns of the S&P 500 for quite some time even if Microsoft succeeds in nothing else but its core businesses, such as the Windows operating system and Office software. These throw off billions of dollars in cash annually. The stock even may outperform the market if the company’s mobile phone and tablet businesses improve. A lot will depend on the performance of the person chosen to succeed CEO Steve Ballmer, who is preparing to leave after 33 years at the company.

Verdict: Microsoft is attractive for a certain kind of investor. It probably will never return to its glory days of the 1990s. But with about $80 billion in cash and a dividend yield of 3%, it’s essentially a slow-growth blue chip that could be a worthwhile core holding for many years. Recent share price: $37.29.

 

E-COMMERCE AND E-MEDIA
Joshua Spencer, CFA

Amazon.com (AMZN). The world’s highest-grossing online retailer pulled in $17 billion in sales for the third quarter of 2013, a 24% increase year over year, as it continued to turn traditional retailing on its head. The problem for investors is that the company doesn’t make much profit. CEO Jeff Bezos has publicly stated that he is more concerned with sales growth and cultivating customer loyalty than with profit because the payoff eventually could be enormous. But several factors could hurt Amazon, including more widespread online sales tax collection and new tactics by competitors such as Best Buy, which now matches Amazon’s prices at its stores.

Verdict: Amazon stock, up 59% in 2013 and fairly valued, is a buy, but only for very aggressive, long-term investors. Bezos wants Amazon to be the only site you use for consumer goods and entertainment—a grand vision but a long-shot bet. Recent share price: $393.37.

Netflix (NFLX). The video-streaming service, whose stock price nearly quadrupled in 2013, has been expanding rapidly, especially with more consumers scaling back on their expensive cable-TV subscriptions. But the advantage Netflix used to have in cheaply scooping up the rights to movies and TV shows is eroding as large competitors such as Amazon have emerged, bidding up the price of content that people want to watch. Meanwhile, content creators—as opposed to distributors—stand to take a bigger piece of the digital entertainment pie.

Verdict: Netflix has been developing its own shows, but there’s no reason to think it will become a leader in that business. Its shares have been—and will continue to be—very volatile, making it a stock for professional traders, not long-term investors. Recent share price: $366.99.