Hot Tech Stock Roundup: Bear Bait or Hype?
David is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are undervalued stocks and then there are overvalued stocks… and then there are stocks everyone loves to talk about. Those that fall in this last category either fall prey to bear bashing or surge off of a pure hype. The best way to gauge whether your "hot stock" is bear bait or a product of hype is to look at its future competitive position relative to the current valuation.
Netflix (NASDAQ: NFLX): Not A Takeover Play
As one of the most notorious NASDAQ stocks on the Street, almost everyone has something to say about Netflix. And usually it's nothing kind… Especially when it comes from my 4-year niece who was previously a frequent viewer of Starz - a content library that Netflix lost rights to after the movie business declined to renew the contract. Costs simply became too expensive for management to bear.
Going forward, the company still looks very expensive at 48.2x forward earnings. While the company is attempting to pursue international growth, it needs to first get its domestic story right. From ticking customers off with a price hike to the proposed creation of Qwikster, Netflix has messed up time and time again. Analysts have lost faith in the stock and now rate it loser to a "sell" than a "buy". However, the company has managed to appreciate in recent days off of, in my view, bogus rumors that Microsoft is interest in buying them out. If Microsoft does, it may be their worst acquisition yet. Many investors have begun to associate Microsoft with a company that continues, but consistently fails, to develop new markets. Why would Microsoft make such a risky gamble in a business it has no experience in?
Then there has been the rumor that Hulu would consider buying out Netflix. In my view, this is also ridiculous. The internet media provider already has an attractive content library, and it would be absurd to pick up an unsustainable business if its attempt is to acquire more titles in the long-term. Purchasing Netflix would load the company up with debt and create an easily criticizable business. You know how much investors hate Netflix... Imagine what they would they think of a business open to even more media pirating if it combined with Netflix's confused future?
Multiple Companies Could Make Facebook (NASDAQ: FB) Irrelevant
Facebook is another media business that everyone has an opinion on. While the company commands one of the greatest economic moats with around 1 billion active users, it is still overly expensive at 35.4x forward earnings. In fact, in my view, the business is even more unsustainable than Netflix's. Social networking became popular not because it answered anyone's life long questions (who cares about what John ate for breakfast), but because it was something "new". Put differently, Facebook is nothing but a fad with around 15% of business coming from a virtual farm, Zynga.
What is there left to be said about Facebook that hasn't already been said. In my view, the market has failed to talk about the alternatives to Facebook that are equally credible forms of social networking. From Google+ to as basic as, yes, the cellphone, Facebook is not as revolutionary as its fanboys have made out. There's nothing stopping Microsoft (FYI: it has a stake in Facebook), Yahoo, and, particularly, Apple from creating a new market that negates the relevance of Facebook. Imagine, for example, if Apple (NASDAQ: AAPL) were to release an installed app that lets iPhone users connect with their friends for constant updates. Pictures snapped, places recorded through GPS, and music listened to could all be instantly uploaded onto your social networking stream. It's the kind of privacy invasion Facebook could only dream of!
While part of this thought experiment is tongue and cheek, it really gets at the point. There's nothing revolutionary about telling your friends what you ate for breakfast; but, if it needs to be done, it ought to be done seamlessly. Apple and Google both have the technology to do that. Google's Android operating system, for example, instantly uploads pictures onto Google+. Perhaps this is the reason why Facebook has hinted at releasing a mobile phone. We can only hope that they don't partner with Nokia and Microsoft in that endeavor…
All things considered, Apple is not a Facebook. While many bears will tell you that Apple's steep growth curve is a thing of the past in light of weak quarterly earnings, the reality, in my view, is that the company has great leverage to penetrate multiple markets. There have been fears that it would take over the turf of industry leaders, such as Sirius, Amazon, and Netflix. Amazingly, no one cared to mention it taking over Facebook's. A bet on Apple should be considered a bet against Facebook.
Compare and Contrast
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TakeoverAnalyst has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, and Netflix and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Facebook, and Netflix. 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.