2 Tech Stocks to Watch: Yahoo! and Facebook

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Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Following three days of losses, will yesterday's market gains hold? Not if this morning is any indication: U.S. stocks opened lower on Wednesday, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES: ^DJI  ) down 0.61% and 0.68%, respectively, at 10:15 a.m. EST. The Federal Reserve concludes its January rate-setting meeting today, and the market is expecting the central bank to ratchet down its monthly bond purchases by another $10 billion. Finally, on the earnings front, two rival technology stocks figure prominently on investors' dashboard today: Yahoo! (NASDAQ: YHOO  ) and Facebook (NASDAQ: FB  ) .

Shares of Yahoo! rose sharply yesterday before the company's fourth-quarter earnings announcement after the market closed. However, the announced results failed to meet investors' expectations if this morning's stock market reaction is anything to go by -- the stock is down 6.3% at 10:15 a.m. EST. This is despite the fact that Yahoo! beat Wall Street expectations on revenue ($1.27 billion vs. $1.20 billion) and earnings per share (adjusted EPS of $0.43 vs. $0.38), and provided revenue guidance for the current quarter that also exceeded the consensus estimate (a range of $1.1 billion-$1.2 billion, against $1.08 billion.)

Some analysts were reportedly disappointed by slowing growth at Chinese e-commerce group Alibaba, in which Yahoo! owns a 24% interest, but a 58% rise in gross profit and a 51% rise in revenue in the quarter ended in September is hardly shabby.

I was more concerned about the fact that Yahoo! CEO Marissa Mayer said that recently departed COO Henrique de Castro will not be replaced. Mayer lured him away from her former employer, Google, at huge expense, only to push him out 14 months later ("Ultimately Henrique was not a fit") and let him keep most of his $60 million pay package. Either de Castro's role was necessary and he ought, therefore, to be replaced, or it wasn't, which would raise the question of why he was hired in the first place. Either way, this fiasco doesn't reflect well on Mayer's judgment and leadership.

In 2013, investors responded to Mayer's energy, poise, and vision, as Yahoo! stock doubled; however, those intangibles cannot levitate a stock price eternally without corresponding results. Yahoo! continues to lose market share in the digital advertising market to rivals Google and Facebook; 2014 is setting up to be a pivotal year for the company's turnaround -- and for the chief executive who initiated it.

And speaking of Yahoo's competitors: Last week, an academic paper out of Princeton University compared Facebook's popularity to the spread of a virus, suggesting that it is a temporary phenomenon. I think that, to paraphrase Mark Twain, reports of Facebook's impending death are an exaggeration -- as will become clear after today's market close, when the company reports its fourth-quarter results. Wall Street is setting the bar high, with analysts' consensus estimates calling for 50% revenue growth and 58.5% EPS growth in 2013. With regard to its fourth quarter, specifically, I think Facebook may surprise to the upside.

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  • Report this Comment On January 30, 2014, at 7:43 PM, PaulTee123 wrote:

    Google failed to make the 22 dollars a share earnings it needed to justify the 1100 dollar stock price it is currently bloatedly inflated to. Google also failed to meet the 65% margins it needed to justify the current bloated high PE PRICE OF 1,1OO DOLLARS a share. This stock should be trading in the 500 dollar a share range, but is being pumped up by the analyst without justification. Maybe if Apple starts to make far less money it's price will be raised by the analyst as well. WALL STREET has become a JOKE.

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Alex Dumortier

Alex Dumortier covers daily market activity from a contrarian, value-oriented perspective. He has been writing for the Motley Fool since 2006.

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