Fallen Stars: A Tale of 4 Tech Giants

Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Retail investors love tech stocks because they know them well.  Who doesn’t use Google search or Yahoo! Finance?  Peter Lynch advocated this style.  He invested in everyday businesses that he noticed or used regularly, and his high-flying Magellan Fund produced jaw-dropping returns.

But there has been a problem with the tech sector – one moment investors can’t gobble up enough shares, and the next those same investors step aside and watch the sector plummet to earth like a faint shooting star.

My finding: be careful.  Here are five companies that echo this advice.

Facebook (NASDAQ: FB)

IPO Price: $38

Current Price: $21.95

Where It’s Headed:

The shift to mobile is a delicate issue for Facebook.  The company has been struggling with losing the makeup of its PC-based gamers.  In 2010 nearly half of Facebook’s active users played games, versus one-fourth in 2011, and it has had trouble rolling out mobile advertising. 

The issue plaguing Facebook is screen size –can it figure a way to place numerous ads on such small mobile devices?  As users continue to migrate their Facebook time from the PC to the mobile phone, Facebook needs to find a way to monetize their eyeballs.  Moreover, users can click through pages more quickly on a PC than on a mobile phone, allowing users to view more ads.

Facebook has been experimenting with its new Mobile Ad Network, still in beta.  But to boost its profits – and to keep pace with Google ads – Facebook needs to invent a way to put more ads in front of mobile users.

Zynga (NASDAQ: ZNGA)

IPO Price: $10

Current Price: $2.82

Where It’s Headed:

Zynga is facing a similar problem as Facebook, with its revenues directly tied to active users on Facebook.  Zynga’s games FarmVille and CityVille, where users can purchase virtual goods for real cash, have underperformed.  And while Zynga’s games like Words with Friends is a major hit, it is struggling to figure out a way to monetize the game for its mobile audience.

The stock price is down more than 70% since its IPO.  To turn things around, Zynga must find a way to extract money from its most enthused customers, and a way to profit from ads in front of others.

Groupon (NASDAQ: GRPN)

IPO Price: $20

Current Price: $4.80

Where It’s Headed:

Groupon was hit hard by what some think as ridiculous accounting.  Its accounting firm Ernst & Young allegedly wrote the rules for Groupon’s new method of recognizing revenue. 

Two college professors, one from Villanova and one from Pennsylvania State University, explain the situation well.

“It is absolutely ludicrous to think that Groupon is anywhere close to having an effective set of internal controls over financial reporting, having done 17 acquisitions in a little over a year,” the pair wrote in an Aug. 24 article on their blog, Grumpy Old Accountants. “When a company expands to 45 countries, grows merchants from 212 to 78,466, and expands its employee base from 37 to 9,625 in only two years, there is little doubt that internal controls are not working somewhere.”

For now, Groupon’s situation looks bleak.  Investors appear to have lost hope in the stock, which is down more than 75% since its IPO.  Once again, the market overestimated a tech company.

LinkedIn (NYSE: LNKD)

IPO Price: $45

Current Price: $121.98

Where It’s Headed:

LinkedIn looks to be a diamond-in-the-rough.  According to LinkedIn, the company boasts more than 175 million professionals.  In Australia, the average household income for LinkedIn users is $150,000.  In the U.K., 59% of members are managers or senior level executives.

Marketers and sales people love these statistics, facts that push them to run LinkedIn ads and to purchase LinkedIn’s premium features.  Also, LinkedIn is a recruiter’s paradise, providing detailed insights and large quantities of data for recruiters to use.

LinkedIn’s share price has forged ahead despite a 1.81% profit margin and a 2.22% ROE.  Moreover, the company earned just $6.9 million, $5 million, and $2.8 million in the last three quarters, from oldest to most recent.  LinkedIn is a true growth stock, with future earnings potential built into its price.  To keep its high valuation, the company must work hard to improve both its top and bottom lines.

Yahoo

All-Time High: $125.03

Current Price: $16.27

Where It’s Headed:

Since the dot-com boom, Yahoo has struggled.  Yahoo has been burning through CEOs like a tech start-up burns through cash, and the company has a number of outdated products.

Marissa Mayer hopes to change that.  The ex-Google employee has visions of turning the company into a customer-focused web giant that can regain its previous prestige.  Also, she has been implementing tricks that she learned at Google to boost employee morale.  What better way to improve your position in an industry than to copy the leader? 

If Yahoo can reinvent its search, which uses Microsoft’s Bing, and if it can regain users to its Yahoo Mail service, the company could begin to grab more precious market share.  And that could go a long way to helping the stock price back to its former glory.

In all, some of these tech companies have had incredible ups and downs, while others have just had the incredible downs.  Investors love the tech sector because it includes household names with products that they know and use. 

But investors beware!  When the hot tech firms fall out of favor, they often fall back to earth.  And with a giant crash.

Dig Deeper

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ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of Facebook and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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