2 Technology Stocks to Watch: Facebook and Google

Facebook impresses with its fourth-quarter earnings, while Google sheds Motorola.

Jan 30, 2014 at 10:15AM

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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.

U.S. stocks opened up on Thursday, with the S&P 500 and the narrower Dow Jones Industrial Average (DJINDICES:^DJI) rising 0.61% and 0.26%, respectively, at 10:10 a.m. EST. Three Dow components will report their fourth-quarter results today: energy super-majors ConocoPhillips and ExxonMobil, and Visa. However, I want to highlight two technology large-caps investors will be focused on today: Facebook (NASDAQ:FB) and Google (NASDAQ:GOOGL).

Facebook reported its fourth-quarter results after yesterday's market close, beating Wall Street expectations on both revenue and earnings per share. Perhaps the most important takeaway from the quarter is that Facebook is, without any doubt, a "mobile franchise," as mobile advertising revenue became the largest component (53%) of total ad revenue, which surged 76% year on year. Fears that the transition to mobile would harm its business, which dogged the stock through the first half of 2013, are dead and buried.

Facebook's profitability and business momentum are impressive, with a generally accepted accounting principles operating profit margin of 44% (56% on a non-GAAP basis!) and $748 million in free cash flow for the quarter. Investors have taken note and are sending the shares up 14% at 10:10 a.m. All I can do under the circumstances is marvel, both at Facebook's operating performance and its share valuation: Even before this morning's pop, the stock was valued at 47 times next 12 months' earnings-per-share estimate (although I suspect analysts will raise those estimates shortly). Facebook will need to continue impressing over the coming quarters in order to justify its share multiple.

Facebook competitor Google is selling Motorola to hungry hippo Lenovo in a deal valued at $2.9 billion, barely more than 18 months after having paid $12.5 billion for the company. While the comparison of those two numbers suggests this was one of those epic failed technology acquisitions (of the sort Hewlett-Packard became notorious for), the reality is more complex.

First, note that Google had already sold off Motorola's TV set-top box business for $2.6 billion. Second, the driving factor behind Google's acquisition was ownership of Motorola's intellectual property, or 17,000 patents. Prior to that, Google was seen as vulnerable in the ongoing "patent wars" in the mobile technology space. At the time of the acquisition, Google valued Motorola's "patents and developed technology" at $5.5 billion. Google's deal with Lenovo includes the transfer of just 2,000 of those patents. Motorola was Google's largest-ever acquisition; while it may not have been a stunning success, it hardly looks like a disaster, either.

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Alex Dumortier, CFA has no position in any stocks mentioned; you can follow him on Twitter @longrunreturns. The Motley Fool recommends Facebook and Google. The Motley Fool owns shares of Facebook and Google. 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.

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