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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.
Despite opening the week with a sharp loss, U.S. stocks managed to finish the week ahead, ending a three-week losing streak. The benchmark S&P 500 rose 0.8% year to date, while the narrower Dow Jones Industrial Average (DJINDICES: ^DJI ) gained 0.6%. Technology/media large-cap names Akamai Technologies (NASDAQ: AKAM ) and Netflix (NASDAQ: NFLX ) were among the best performers in the S&P 500, while shares of Twitter (NYSE: TWTR ) suffered a bloodletting.
Akamai Technologies was the best-performing stock in the S&P 500 this week, up 18.8%, after announcing stunning fourth-quarter results on Wednesday afternoon. Revenue and adjusted earnings per share rose 20% and 11% relative to the prior year quarter -- enough to beat Wall Street's consensus estimates. The company also offered guidance on earnings per share for the current quarter that was higher than the then-consensus estimate (analysts subsequently raised their estimates for first quarter and full-year 2014 earnings-per-share). CEO F. Thomson Leighton summed things up by stating: "We were extremely pleased with how the business performed in the fourth quarter and throughout 2013, with strong growth across all our solution offerings and geographies." I won't disagree.
For more on this story, Brian Nichols looks at whether post-earnings gains at Level 3 and Akamai will be short-lived.
Shares of Netflix, up 5% this week, appear to be still basking in the glow of a superb Jan. 22 earnings report (the stock was the best performer in the S&P 500 that week). It may have been helped by a mea culpa from Morgan Stanley; in a report published on Jan. 31, analysts Scott Devitt and John Egbert wrote: "We thought Netflix would enter a period of slowing U.S. sub growth before international users could offset the slowdown. We were wrong."
Consequently, they upgraded the stock to "equal weight" from "underweight" (they had only just downgraded the shares on Jan. 7, causing them to lose nearly 6% that day). We applaud the Morgan Stanley analysts for having the intellectual honesty to call themselves out.
This illustrates that shares of Netflix are highly volatile and analysts' recommendations are poor guideposts for long-term investors.
Despite recovering nearly 9% on Friday, shares of another growth darling, Twitter, were brutalized this week, down almost 16%, after the company reported its first set of quarterly results on Wednesday afternoon. The enormous momentum that had pushed the stock up more than 150% from its IPO offering price reversed after hitting a concrete wall in the shape of relatively weak total user growth -- just 4% relative to the third quarter, with just 1 million U.S. users added in the fourth quarter. As I wrote on Thursday morning:
For the first time, it seems, investors are taking stock of the fact that Twitter is not a mainstream product -- and it may never be. As I have pointed out before, Twitter is less user-friendly than Facebook and its usefulness less is obvious -- these are barriers to widespread adoption... Twitter is hugely visible, in part because it is so popular with members of the media. However, that media "megaphone" cannot now mask the fact that it remains a niche product. Whether it can graduate to mainstream status will determine if it can grow into its valuation -- a task that has been made a bit easier with today's decline.
Even after this week's decline, the shares don't particularly cheap to me -- investors should carefully assess their own tolerance for losses before jumping into this stock, which is suitable only for risk capital.
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