LONG BEACH Calif. (Reuters)
- (The opinions expressed here are those of the author,
a columnist for Reuters.)
Many tech companies saw their high-flying stocks lose altitude this
year.
Leaders in social media like Twitter Inc. and LinkedIn Corp. fell
more than 40 percent from their 2014 highs. Others, such as the
retailer Amazon.com Inc., took more modest drops, although
shareholders might not have found them modest at the time.
These stocks, among others, are cheaper than they were, but are they
cheap enough? They almost certainly can't be considered bargains by
normal valuation yardsticks. Their price-earnings ratios – when
there are earnings – can run close to or into triple digits.
Portfolio managers find, however, that some businesses offer
sufficient growth potential to warrant bets around current prices.
Kevin Landis, manager of the Firsthand Technology Opportunities
Fund, has been adding to his position in Twitter, a longtime
holding, because he expects the stock to improve over the long haul
as the company evolves from an upstart held in tech portfolios into
a respectable blue chip that will be far more widely owned.
"It's only a matter of time before Twitter goes into the S&P 500,"
says Landis, a Silicon Valley investor since the days of CompuServe
email addresses composed of long strings of numbers. "Like Google 10
years ago or Facebook two years ago, everyone will have to own
them."
The reason that Twitter plunged in the first place, losing more than
half its value, is that investors pulled back ahead of anticipated
selling by corporate insiders. Many feared a massive dumping of
Twitter stock once the lock-up period from the company's November
initial public offering ended. That has abated, Landis says, and the
stock "really looks like it has found a bottom."
Landis also holds Google Inc. along with Facebook Inc., which has
nearly quadruped in value since late 2008, but he's having
reservations about the latter. Landis questions how much growth
potential Facebook has left and warns that he may sell before the
year is out.
"I'm still happy to hold it, but at over $160 billion [in market
value], how much can it possibly make in the next 10 years?" he
wonders. "I don't know that we'll hold it forever."
Landis has no such misgivings about LinkedIn, a social-media company
for professionals. He remained invested through the recent plunge
and believes that the stock is worth buying today.
"We own it and would consider adding to it," he says. "It's a top
brand. It's hard to imagine a scenario where LinkedIn fades from
view." The $110 million Firsthand Technology Opportunity is up an
annualized 20 percent in the five years through June 27, according
to Lipper, a unit of Thomson Reuters. The fund has an expense ratio
of 1.85 percent.
John Toohey, head of equities for USAA Investments, which offers the
$571 million USAA Science & Technology Fund, has similar opinions
about Facebook and LinkedIn, only reversed.
Facebook, a holding in several USAA portfolios, including Science &
Technology, is the one with the greater growth potential, in his
view, because its everyman customers are more tolerant of having ads
thrust in their faces than the professionals who use LinkedIn.
"They have huge opportunities to monetize their base," Toohey says
about Facebook. Still, he encourages the company not to be greedy by
saturating the site with ads or allowing ads that are targeted so
precisely to users that it becomes obvious just how much information
the company has on them.
"People are fine being marketed to," Toohey says, "but they need to
strike a delicate balance."
AMAZON'S BALANCING ACT
Amazon.com, whose stock fell more than 25 percent earlier in the
year, may need to execute a balancing act of its own. Amazon has
spared little expense in growing its business to become a dominant
retailer, but companies that spare little expense tend to have thin
profit margins and generate anemic cash flow, Toohey notes. USAA
Science & Technology delivered an annualized return of 21 percent in
the past five years. The fund's expense ratio is 1.34 percent.
"We own some Amazon, but we're cautious about it," he says. "The
challenge is whether they'll ever slow down spending to ramp up cash
flow and margins."
Another possible impediment to Amazon and its shareholders is that
it sends out so many packages at such short notice that delivery
services like FedEx Corp. and United Parcel Service Inc. eventually
may balk at doing the heavy lifting, at least at current prices.
"Amazon could shoot themselves in the foot," Toohey warns. "If FedEx
and UPS are going to be able to support all that volume with two
days' notice, they'll have to hire people and do logistics. Are they
going to get paid for it?"
Prospective buyers of tech high fliers may be asking themselves the
same question. Recalling the 2000 crash, Landis concedes that
investors can get hurt in companies like these, but he highlights a
difference between now and then – a dearth of opportunities for
growth in other assets.
"After a long bull market, there's nothing to go back to," he says.
"When people take money off the table and look around, they see that
gold is played out, at least for now; there's not much [to make] in
bonds, and stocks of old-guard companies aren't growing that fast.
You can go for dividend yield or you can go for growth."
(Follow us @ReutersMoney or at http://www.reuters.com/finance/personal-finance
Editing by Lauren Young and Cynthia Osterman)
