It's do or die for tech stocks
Wall Street is getting more selective and demanding profits from this hyped-up sector.
By Jeff Reeves
Tech stocks have been mighty choppy this year.
On one hand, Facebook (FB) is up strongly on the year, with 15 percent gains so far in 2014 after great earnings in January. On the other hand, e-commerce darling Amazon (AMZN) has shed more than 16 percent as investors worry about profitability in the wake of a fourth-quarter earnings miss.
Similarly, the initial public offering space is muddled for tech stocks. Some recent tech IPOs are up strongly -- like China's 500.com (WBAI), which has almost tripled from its December offering price. Other recent issues, like the IPO of mobile video game studio King Entertainment (KING) -- which sold off on its first day of trading and remains down since going public in March -- have gone pretty poorly.
So what gives, and why the two very different paths for tech stocks lately?
Simply put, it's do or die for the sector as Wall Street gets more selective and starts demanding profits from these hyped-up tech stocks . . . and investors holding underperformers are going to pay the price.
Amazon is the poster child for this new world for tech. Sure, the company continues to grow its top line strongly and is a force to be reckoned with in e-commerce . . . but where are the profits? All those plans for drones, Amazon's new Fire TV gadget and other quirky ideas haven't really amounted to significant profits, and investors -- long willing to give valuation a pass -- are starting to question the forward P/E of about 80 for the stock right now.
In a recent MarketWatch column, I outlined three particular areas of tech that are struggling right now to put up the numbers:
- Enterprise tech companies like Cisco (CSCO) and Oracle (ORCL), as well as upstart cloud companies like WorkDay (WDAY)
- Internet stocks like Yahoo (YHOO) that are seeing declining margins and a struggle to grow.
- E-commerce sites from Amazon to eBay (EBAY) to specialized platforms like the travel booking site HomeAway (AWAY).
This is not to say that every one of these stocks is doomed -- some are actually solidly set for the long term -- but as tech earnings get into full swing, investors need to remember that a mild miss could mean a big move for any of these tech stocks given the pressure of the moment.
Tread lightly in tech right now, particularly with names that are heavily reliant on sentiment to keep their momentum up.
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Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. As of this writing, he did not hold a position in any of the aforementioned securities. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP.
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After enjoying a smooth rise in stock prices since May, investors are about to be hit with another bout of volatility.
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