It's do or die for tech stocks

Wall Street is getting more selective and demanding profits from this hyped-up sector.

By InvestorPlace Apr 23, 2014 2:01PM

Credit: © Rick Wilking

Caption: Boxes from Amazon.com are pictured on the porch of a houseBy 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.


More from InvestorPlace

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 editor@investorplace.com or follow him on Twitter via @JeffReevesIP.

8Comments
Apr 23, 2014 3:02PM
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But just last week it was how the Tech's were bolsetering Wall Street? No there is too much BS in the Wall Street breeze!
Apr 24, 2014 6:56AM
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Why worry about profits, worry about eyeballs. It worked well in 2000.
Apr 23, 2014 2:23PM
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There will be a leveling of the playing field...........and those who played in the "street" will be playing in the ally.
Apr 23, 2014 5:00PM
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A Federal Investigation into the "ad revenue" thing is in order. Basically, each tech banner ads each other's sites and no actual monies ever change hands, just appear to on financial statements. we are more than a QUADRILLION in the hole from this sort of kiting and book cooking. 
Now Apple will do a major split hoping to get smaller pockets roped in to their stupidity. More folks are dumping "tech" to get a life than increasing the customer base. Those gripped by the addiction can't do much else and are genuinely unproductive. In 5 years, you won't remember Apple. 
Finally, how many times are they going to shove Twitter and Linked-In in our faces? Neither of these cardboard businesses do America any good. One coddles click cliques and the other is a selective venue for degrees used like badges so the incompetent stand out. Neither does anything for progress, recovery or economy.  
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