Tech Sprinters of 2012: Some Ran in the Wrong Direction
Nicholas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There were two extremes in the stock market over the past year, "The Best and Worst Stocks of 2012," and the technology industry exhibited the same extremes. In fact, the technology industry and especially internet-based companies can be used exceptionally well to analyze the two extremes. Nonetheless, the most crucial thing is what to expect from these stocks in 2013. The past has and will always be useful in predicting the future. Some good examples of companies exhibiting contradicting returns include, the winners: Amazon (NASDAQ: AMZN), Salesforce (NYSE: CRM) and losers: Groupon (NASDAQ: GRPN) and Zynga (NASDAQ: ZNGA) among others.
Amazon rallied 40 percent during the year while Salesforce was up 73 percent. On the other hand, Groupon slumped nearly 75 percent while Zynga plunged 75.03 percent during the year. The biggest challenge that remains for the winners is whether or not, Amazon and Salesforce can mirror their 2012 performance in 2013 while for the losers, is a question of whether they can make things better during the current campaign. Do Groupon and Zynga provide a perfect buying opportunity, and is it time to short Amazon and Salesforce? Well, probably not. In fact, there is every reason that it's going to get tougher than before for Groupon and Zynga, and there is nothing that suggests that Amazon and Salesforce will have a tough campaign.
The gaming company recently announced that it plans to start its turnaround campaign by cutting costs. Indeed cost-cutting seems to be a key strategy for all companies that fall from grace. Zynga's 75 percent fall is certainly going to be a tall order in a turnaround campaign. The company has shut down 13 games thereby impressing the investment fraternity. However, this was not so for its customers. The closure triggered a 1.3 percent gain in the company's stock to end the year at $2.36 per share.
Zynga largely relies on sales made through Facebook (NASDAQ: FB). The social networking giant did not have the best of years either, having gone public only to lose 50 percent of its value before embarking on a rally towards the end of the year. Facebook is now rated overweight by leading analysts, but still faces a challenge of monetization of its massive user base. In July, the social networking giant changed the way games appear on its platform. It now shows games starting with the most recent as compared to most popular, thereby affecting Zynga's popular games like Cityville and Farmville.
Zynga can as well counter this effect by moving its players to Zynga.com, but certainly will lose out on the massive user base, which gives it wide access to customers.
The daily deals company experienced an exodus of staff including 4 executives and more than 100 sales staff. The company's plans to shift focus from daily deals to Groupon goods and received criticism from analysts because of the low margins reported from Groupon goods. The company's CEO Andrew Mason also came under criticism following the poor performance and frequent revisions on revenue estimates, which increased the stock's volatility. He was quoted saying that if he felt that he wasn't the right person to lead the company, then he would "fire himself."
Groupon faces stiff competition from industry giants Amazon and eBay, and will face an uphill task in posing any significant challenge to the two. Social networking company, Facebook has also joined the eCommerce market with its Gift Service, and there is no limit as to what it would add to that during the current campaign.
The world's largest online store’s main challenger in online sales is eBay, which remains the only company with the ability to threaten Amazon's leadership in eCommerce. eBay rallied 62.73 percent in 2012 and still promises to build on that gain going forward. eBay introduced a new platform towards the festive season including a Pinterest like feed that curates a user's favorite search terms. The company also updated its search function and included bigger photos, as well as relevant product info on each item’s page. Whether or not these could play a role in ousting Amazon remains to be seen.
Amazon is also likely to face a challenge in its E-book business from Barnes & Noble's Nook business, which also includes a significant investment from Microsoft (16.8 percent) and British publisher, Pearson (5 percent). Its tablet business also faces competition from Google's Nexus tablet and Apple's iPad mini, but Amazon seems to be compensating any margin losses from these business units with its online sales portal. Amazon also introduced Afterschool.com to trade sporting goods in 2012 and will likely balloon going forward.
The cloud-computing titan reported a 73 percent rise in stock price in 2012, one of the biggest gains across all counters. Selling of enterprise software proved to be a good piece of business and 2013 can only get better. Indeed, if I were to take cloud computing in a product development chart, I would say it is far from reaching the peak. The main challenge is of course competition. This kind of business has limited barriers to entry; although customer loyalty cannot be doubted. Few enterprises would be interested in changing their software in favor of untested providers.
Nmaithya has no positions in the stocks mentioned above. The Motley Fool owns shares of Amazon.com and Facebook and has the following options: long JAN 2013 $50.00 puts on Salesforce.com and long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Amazon.com, Salesforce.com, eBay, and Facebook. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!