David Gardner: I Don't Like These Stocks

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

Motley Fool's David Gardner has made some outstanding picks over the years. His Rule Breakers service has more than doubled the returns of the S&P 500 since its inception. Though I'm keenly interested in his stock picks, I'm also interested to hear what stocks he doesn't like. As shown in the video below, Zynga (NASDAQ: ZNGA), Microsoft (NASDAQ: MSFT), and Wal-Mart (NYSE: WMT) are three of those stocks.

I'll break down each of these companies with some key bearish and bullish takes.

Zynga

Bull

  • Zynga's new contract with Facebook removes Facebook's 30% cut.
  • Social gaming is still a growth market. Daily and monthly active users of Zynga's social games have increased by double digit percentages, year over year, in the company's most recent quarter.

Bear

  • Zynga's heavy reliance on Facebook's platform makes projecting the company's future a difficult task.
  • Zynga's new contract with Facebook means that Facebook could produce its own games if they decide to.

Microsoft

Bull

  • Microsoft's Office, Server and Tools, and Entertainment and Devices (Skype and Xbox) segments have performed exceptionally well over the last five years. Together, these three segments represent a significant 71% of sales.
  • Microsoft's Azure platform is on track to dominate in the cloud like Windows did in personal computers.

Bear

  • Microsoft's Windows OS business is on the decline with little sign for a rebound.
  • Microsoft was late to the mobile OS game, a huge strategic misstep that could hinder users' reliance on Windows as customers spend more time on alternative mobile systems that introduce them to alternative operating systems, like Apple's OS X.

Wal-Mart

Bull

  • Scale is the name of the game for Wal-Mart. If its market share is ever threatened it can simply lower prices to regain market share.
  • If the company's heavy investments in e-commerce pay off, investors could be rewarded with Amazon-like returns on capital (superior to Wal-Mart's).

Bear

  • The company has failed to provide solid barriers to entry to e-commerce entrants, especially Amazon.
  • If Wal-Mart finds a way to succeed in e-commerce, the result could be cannibalization of its own big box locations.
  • Costco continues to outperform Wal-Mart's Sam's Club with no signs of the trend reversing.

David's Take

As far as Zynga goes, David doesn't like the fact that the company is so dependent on Facebook's platform. He believes that the company "has no meaningful innovation ability that I can project going forward."

Microsoft and Wal-Mart? Massive scale isn't enough, David claims. He is uncomfortable with massive over-scaled enterprises in today's fast-changing environment. He points to Amazon's success in Wal-Mart's space and Apple and Google's success in Microsoft's space as examples.

My Take

With more more than 70% of Microsoft's business witnessing double digit growth and a stock priced for decline, I'm bullish on Microsoft. In fact I recently made an outperform CAPS call on the company. Sorry, David.

Zynga, in my mind, has no durable competitive advantage whatsoever. I'd have a tough time projecting anything even just twelve months out. I've never been interested in the stock, and I'm still not.

And as long as Amazon is around, Wal-Mart's story seems to be at risk, in my opinion.

So as far as Zynga and Wal-Mart go, I agree with David; they are stocks that I don't want to invest in.

What's your take?


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