Facebook Inc (NASDAQ:FB)
has fallen 50% from its IPO price. Zynga is doing even worse, and might
not be able to survive as an independent company. Groupon still isn’t
profitable- at least the way that any normal company would calculate
profits- and is down 82% from its own IPO price. And now it’s looking
like we may be experiencing more than the popping of a social bubble,
with Google Inc (NASDAQ:GOOG) and Microsoft Corporation (NASDAQ:MSFT) both reporting disappointing earnings last week; Google’s poor results sent the stock tumbling about 10% on the day.
Compare the poor performance of these
companies to the rebound taking place on maligned Wall Street. So far in
earnings season, Morgan Stanley, Goldman Sachs, JPMorgan Chase, Bank of America Corp (NYSE:BAC), and Citigroup Inc. (NYSE:C)
have all beaten expectations, some by substantial margins. And this
comes after their stock prices have soared this year: now, Morgan
Stanley is up by 15%; JPMorgan Chase about 25%; Goldman and Citi by
about 40%, and Bank of America’s stock by 70%. Read our most recent analysis of many of the most frequently owned banks.
So why is the Street trouncing the
Valley (and Redmond)? Whatever the reason, it doesn’t seem to be
something that hedge fund managers perceived. Citigroup, Bank of
America, and JPMorgan Chase all made our list of the ten most popular
stocks among hedge funds for the second quarter of 2012, but they
weren’t as popular as Google Inc (NASDAQ:GOOG) or Microsoft (see the full ranking of the most popular stocks).
The argument can be made that many of
the technology companies’ problems are company-specific. Arguably,
Groupon was always a bad business model, with investors only realizing
that fact after its IPO; Zynga was doing quite well until Facebook Inc
(NASDAQ:FB) altered the layout of its website and choked off much of the
company’s user base; Microsoft’s customers are waiting for new versions
of the Windows and Office software, earnings will pop next year. And
it’s certainly true that part of the reason for Facebook Inc
(NASDAQ:FB)’s decline was that its share price had been bid up by
glamour investors who were seduced by its usership numbers. However, we
think that particularly with Google Inc (NASDAQ:GOOG)’s results some of
the decline at some of these companies is coming as businesses decide
that online advertising is not a good investment, driving down
advertising rates.
At Google Inc (NASDAQ:GOOG), for
example, cost-per-click revenues fell 15% in the third quarter compared
to Q3 2011. This can’t possibly be good news for Facebook Inc
(NASDAQ:FB) either, and we’ll keep an eye on its revenue numbers when it
releases its quarterly report on October 23rd. In addition,
the new environment of mobile Internet usage has provided a challenge
for advertisers who have spent the last several years designing their
strategies for traditional PC usage. It’s certainly possible that
Internet companies will devise ways to serve mobile ads alongside
content that delivers good value to users and customers, but it at least
should take time. We also think that the barely profitable Groupon is
failing to offer good marketing services to its customers, and we’re
skeptical that further growth will fix that problem (though we’d note
that at a forward P/E of 13 we’re in disagreement with sell-side
analysts on that point). Zynga was barely profitable in its prime, when
it dominated Facebook gaming, and was likely overvalued then; at some
point its cash makes it attractive, but we’d still avoid the stock.
At the banks, meanwhile, interest rate
dynamics have provided cheap money to finance trading operations (as
well as a wider spread on the interest rate that the banks with retail
operations have to pay their depositors) which have offset struggling
investment banking fees. The Federal Reserve has committed to keeping
interest rates low for some time, and even outside Fed involvement an
uncertain global economic environment will contribute to low rates. Citi
and Bank of America still trade at substantial discounts to the book
value of their equity, and at forward P/E multiples of 8 and 10,
respectively. As such, they are considerably cheap; while we do think
Bank of America may be struggling enough to make needed cost cuts that
we wouldn’t buy the stock at this point, we do still see Citi as a value
play. JPMorgan Chase and Goldman Sachs are also in the 8-10 range in
terms of forward P/Es, and with good growth in the third quarter over Q3
2011 they could be good values as well.
Our impression is that Facebook
(NASDAQ:FB), Zynga, and Groupon may have stabilized for now, but still
aren’t good values by any means. Google Inc (NASDAQ:GOOG) and Microsoft
(NASDAQ:MSFT) don’t look particularly expensive, but are dependent on
advertising revenue and successful product releases respectively. It
looks like the banks are still better buys than the big-name technology
and Internet companies.
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