Watch stocks you care about
Your own personalized stock watchlist!
It's a 100% FREE Motley Fool service...
The Dow closed out a week of continuing gains and now sits just 103 points away from hitting its 52-week high. But with the companies below going down hard, first let's see whether they had good reason to drop. Sometimes, panic-fueled declines can make excellent buying opportunities.
A disconnect on growth
My thesis for investing in Alcatel-Lucent (NYSE: ALU ) is that it will be a primary beneficiary from the expansion of 4G long-term evolution. Carriers are going to need its small-cell technology to carry the heavy load next-gen mobile communications is going to place on the industry's infrastructure. It already owns 20% of the LTE market, but it also holds 25 important mobile-operator commercial femtocell deployment agreements that will have its technology placed on telephone poles, the sides of buildings, and anyplace where it's otherwise difficult for tower coverage to reach.
That thesis was in no way undermined by Alcatel's earnings report released earlier this week that sent its shares tumbling 18%. Its LTE business was three times what it was last year, and though the company got walloped on its China business, where GSM dropped 90%, that had more to do with the government's move to push bids out for another quarter. Alcatel is fully expecting that to rebound in the second quarter and that the 300-basis-point drop in gross margins, a large part of which was tied to China, will recover as well throughout the year. The LTE business does carry lower margins than it recognized from CDMA and GSM, but they're actually better than expected, so although the economy in Europe and the U.S. does weigh on forecasts, the drubbing it took after earnings on Thursday (and continued punishment on Friday, when it closed down another 2.5%) seems unwarranted.
I'll admit the North American market was weaker than I expected. Ericsson (Nasdaq: ERIC ) , for example, reported some robust gains here despite the challenges, but Alcatel was able to return to profitability in the segment, an often elusive target, by having sold its Genesys call-center business, a move analysts had previously criticized. I'm confident they'll be wrong about Alcatel's ability to hit its cash flow targets as well and see at least the sense in management's contention that much of the negativity in the report was around the "calendarization" of issues that will right themselves as the year progresses.
CAPS member dividendsrus seems a little dismissive of its prospects, seeing some "salvage value" left in the stock, but its licensing deal, where it will offer access to its patent portfolio to companies through a syndicate, could generate as much as 1 billion euros for the company. Add Alcatel to your Watchlist, and then tell us on the Alcatel Lucent CAPS page whether it will recover as the year progresses or whether will investors hang up on the stock altogether.
Content at a price
Falling margins were also to blame for Akamai's (Nasdaq: AKAM ) getting crushed, too, as competition from Limelight Networks and Level 3 Communications (NYSE: LVLT ) pressured the development of content-delivery networks. The broad move to cloud computing by enterprise-level businesses, coupled with consumer-based mobile-computing platform growth, ensures that those companies delivering content will report strong demand.
And Akamai did, seeing revenues jump 16% and profits coming in ahead of analyst expectations, but they were only flat with the year-ago period. But by bolstering its acceleration technology segment with acquisitions and adding top rival Cotendo to its portfolio, it solidifies its industry-leading position.
Yet that doesn't mean it can't feel the pressure, and with telecoms like Verizon (NYSE: VZ ) and AT&T developing their own CDNs, margins will feel the impact as it tries to maintain share. That's why it also forecasted seeing gross margins slip in the second quarter.
With 96% of the more than 3,200 CAPS members rating the content-delivery specialist to outperform the market, it's clear they believe the company won't be marginalized. But tell me in the comments section below or on the Akamai CAPS page whether you think it can still speedily recover, and then add the stock to the Fool's free portfolio tracker to watch the competing CDNs vie for share.
Ready for a resurrection
These stocks might be in turmoil, but there's one tech stock The Motley Fool thinks will profit from the next technological revolution. Get "The Only Stock You Need to Profit From the NEW Technology Revolution" to find out who's breaking all the rules to become the one to make the rules. This is a special free report that you can access right now -- it's free.