Tech stocks followed the rest of the market northward last week, with the information technology sector posting a 3% uptick. While that gain across an entire sector is impressive, not every company saw its fortunes soar. Here are the seven biggest tech losers across the past week.
Weekly Price Change
Source: S&P Capital IQ. Companies must be greater than $500 million in market cap and listed on U.S. exchanges.
Overall, the lumps weren't too bad for this week's losers. When you consider that the worst-performing tech stock out of the 932 traded on U.S. exchanges with market caps above $500 million was only 8.4%, it's pretty clear that the tech sector is booming.
So what caused these stocks to plunge last week?
Harmonic's drop during the week apparently stemmed from the CFO's comments at last week's ROTH Conference about weakness in the company's European business. I once had a manager of a short fund tell me the small-cap and growth-minded ROTH Capital Partners conference was "a short seller's dream," so it doesn't surprise me that any perceived weakness quickly pressured the stock.
In the long run, these kinds of comments don't have much effect on Harmonic's performance. The real news surrounding Harmonic this week was having Cisco signaling how serious it is about the digital video space with its $5 billion buy of NDS. On one hand, Harmonic's largest rival is throwing its weight around. On the other hand, the acquisition sheds more light on the next-generation video space. These contrasting forces seem to be in full effect, as the company traded three times its average volume on Friday, but the bears who fear Cisco seem to be winning for the time being.
Your guess is as good as mine on why Ancestry.com keeps plummeting. With a user base of around 1.7 million, the days of heady subscriber growth might be gone. However, that's not to say the days of earnings growth is dying along with it.
For one, the subscription model Ancestry follows means cash flows run in front of recorded earnings as the company builds its balance of "unearned revenue." If you look at the past 12 months, Ancestry recorded operating cash flow of $131 million on only $63 million in earnings. Second, you can always upsell existing customers to additional premium offerings if you have a loyal user base that values the service. That's a key opportunity I think you could see play out in the coming years.
My gut feeling is that Ancestry.com is undervalued at less than 10 times trailing free cash flow, and with a stable business model that avoids the reliance on ad spending that squashes other Internet companies. Whatever has spooked Ancestry investors out seems overblown to me.
Zynga had seen a bounce back recently after the announcement of the gaming company's zCloud platform, which will let it whittle away its reliance on Facebook. However, that rally was short-lived, as Zynga fell back this week on news that it was filing for a secondary offering of $400 million. As fellow Fool Rick Munarriz points out, Zynga doesn't need the money but is instead offering the shares to prevent a large sell-off when its "lock-up" period ends and early shareholders will exit.
Whether the company is looking to avoid a mass dumping of shares at the end of a lock-up period or ease selling across a longer period, Zynga won't be able to keep its shares from plummeting over the long term if its key business metrics keep trending the wrong way. This is one stock I'll continue to avoid.
One more for the road
A string of irrational market euphoria can send even the worst-run companies soaring for a time, but it's the best-run companies that will thrive in the long run. Learn about the one stock the Fool's chief investment officer picked to crush the market in this free report: "The Motley Fool's Top Stock for 2012." Instant access is just a click away.
Eric Bleeker and The Motley Fool own shares of Cisco Systems. Motley Fool newsletter services have recommended buying shares of Ancestry.com. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.