The tech sector fared well this year as investors flocked to hardware and software stocks that were well-insulated from the COVID-19 crisis. That trend might continue next year as the market grapples with the economic aftershocks of the pandemic, but not every tech stock will be a compelling buy.
Let's take a closer look at three wobbly tech stocks that you should avoid next year: Intel (INTC +2.56%), Momo (MOMO 3.79%), and Tencent Music Entertainment (TME 4.37%).
1. Intel
Intel's stock lost nearly a fifth of its value this year as the chipmaker made several costly mistakes. Last year, it suffered a chip shortage as its troubled development of 10nm chips throttled its supply of 14nm chips. It gradually resolved that shortage this year, but stumbled again when a defect delayed its mass production of next-gen 7nm chips to 2022.
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Intel is struggling because it manufactures its own chips. Its main rival, AMD, outsources the production of its chips to TSMC, the world's top contract chipmaker. TSMC pulled ahead of Intel's foundry in the "process race" to create smaller chips, which provided AMD and other fabless chipmakers with a steady supply of current and next-gen chips.
As a result, AMD more than doubled its share of the CPU market from 17.8% to 38.4% between the fourth quarters of 2016 and 2020, according to PassMark Software. Intel's share fell from 82.2% to 61.6% during the same period, with losses across the desktop, laptop, and server markets.
Meanwhile, Intel CEO Bob Swan, who was previously its CFO before Brian Krzanich's abrupt resignation in 2018, reduced the chipmaker's capex instead of aggressively fixing its production issues. Swan also decided to divest Intel's profitable NAND memory business, cut costs, and ramp up its multi-billion dollar buybacks to boost its EPS.
None of those financial moves will fix Intel's long-term problems. Analysts expect its revenue and earnings to both decline about 6% next year -- and it will likely remain out of favor for the foreseeable future.
2. Momo
Momo, which owns two of the top dating apps in China, was once considered a promising growth stock. The addition of live streaming videos to its core app in 2015, which let viewers buy virtual gifts for their favorite broadcasters, caught fire and generated triple-digit revenue growth through 2017 before decelerating over the past three years.
That feast led to a famine as the market was saturated by similar streaming apps while government regulators -- fearing the circumvention of their censorship rules -- cracked down on live streaming platforms. Both Momo and Tantan, the Tinder-like dating app it acquired in 2018, were temporarily suspended last year due to allegations of inappropriate content.
Both apps were fully restored after three months, but Momo and Tantan subsequently struggled to grow. Last quarter, Momo's monthly active users (MAUs) on its main app dipped year-over-year from 114.1 million to 113.6 million. Its total paid users on Momo and Tantan fell from 13.4 million to 13.1 million.
Momo blamed that slowdown on the COVID-19 crisis and its impact on high-paying users, but other popular live streaming platforms like Bilibili and Huya generated much stronger growth during the same period. Those unfavorable comparisons caused Momo's stock to tumble more than 60% this year.
Analysts expect Momo's revenue and earnings to decline 7% and 36%, respectively, this year as it grapples with those problems. They expect a moderate recovery next year as its revenue and earnings rise 5% and 7%, respectively, but its recent struggles indicate its high-growth days are over.
3. Tencent Music
When Tencent Music, China's top streaming music company, went public in late 2018, it seemed like an attractive alternative to Spotify. Unlike Spotify, which remains unprofitable due to high licensing fees, Tencent Music generated consistent profits from its social entertainment business -- which housed its live streaming karaoke platform WeSing.
Image source: Getty Images.
On the surface, Tencent Music's business looks stable. Analysts expect its revenue and earnings to rise 23% and 10%, respectively, this year. Next year, they expect its revenue to rise 22%, with 20% earnings growth.
However, two major challenges could prevent it from hitting those targets. First, Tencent Music's online music (streaming and downloads) and social entertainment platforms both lost mobile MAUs last quarter. Both businesses partly offset those declines by boosting their average revenue per paid user (ARPPU) with more online music subscriptions and virtual gift sales on WeSing.
Second, Tencent Music faces intense competition from NetEase's Cloud Music, which is backed by Tencent's rival Alibaba. NetEase and Alibaba both pay Tencent Music sub-licensing fees for its exclusive songs, but they've repeatedly complained that those fees are too high. Those complaints, which sparked an antitrust probe of Tencent Music last year, forced the company to lower its fees.
The loss of that higher-margin revenue, along with its slowing MAU growth and investments in new content, have been throttling its total margins. Tencent Music's stock has already risen more than 40% from its IPO price -- but I wouldn't buy any shares next year until its MAU growth stabilizes and its gross margins improve.
