2014 was a solid year for the markets: the S&P 500 finished with an 11% gain. But a few tech stocks turned in even better performances. In particular, Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), and Electronic Arts (NASDAQ:EA) trounced the market, soaring in 2014.
Is it time to take profits in these tech stock winners? Or should investors in these stocks consider holding? Below, three Motley Fool contributors offer their takes on some of last year's best performers.
Bob Ciura (Facebook): Facebook continued to be a huge winner for investors last year. The stock gained more than 40% in 2014, which handily beat the broader market yet again. This continued a longer-term trend of strong outperformance since Facebook's initial public offering. Facebook's share price has doubled since its May 2012 IPO, as its key metrics -- revenue, active users, and profits -- have all racked up strong growth. Indeed, last year Facebook grew revenue and earnings per share by 58% and 83%, respectively, as monthly active users reached 1.39 billion.
But at some point, investors need to consider Facebook's valuation. The stock trades for 70 times 2014 GAAP diluted earnings, which is a significant concern. So far, investors seem too willing to brush aside Facebook's valuation, but that can be dangerous thinking. When discussing valuation as it pertains to social media stocks, some argue that valuation doesn't really matter for growth stocks. Instead, these companies will grow fast enough to justify their lofty valuations. And many times, that's absolutely true. However, there comes a point Facebook can't keep growing at accelerating rates.
Facebook is now a $214 billion company by market capitalization. This is an enormous company. Investors buying in at these levels are at risk of poor future returns, if and when Facebook's tantalizing growth finally begins to slow down. Even great companies can be bad investments in cases of overvaluation. Investors may want to take some of their Facebook profits off the table.
Tamara Walsh (Apple): The tech giant was a high flyer last year, with its stock gaining nearly 79% compared to just a 14% gain by the S&P 500 over the same period. Apple has enjoyed such a momentous run, in fact, that it is now worth more than the entire S&P 600 small-cap index. And with a market cap north of $755 billion today, Apple is not only the most valuable company in history, but it is also worth more than double any other publicly traded company on the market today.
Nevertheless, with shares of Apple currently trading near record highs at around $130 apiece, many investors worry there could be a correction on the horizon. For starters, there's a lot of pressure building around the tech titan's upcoming Apple Watch launch, which is set to hit the market in April. The company is planning a media event on March 9 that many speculate is related to the anticipated debut of its first truly wearable device. Yet, if Apple's upcoming iWatch isn't a hit with consumers it could bolster concerns that Apple is losing its innovative edge -- a reality that would likely crush the stock in its wake.
However, the stock's stratospheric surge and future execution risks are hardy reason enough to sell this tech stock superstar. Even if Apple's iWatch is a flop, the company has enough liquid assets and cash on hand to offset any related losses. Not to mention, Apple will continue to reward current shareholders through dividends and share buybacks. Apple, for example, spent more than $56 billion last year on dividends and share repurchases, and analysts at Credit Suisse believe Apple will raise its capital return plan to $202 billion by 2017, according to the Financial Times.
Therefore, even at all time highs, Apple is one tech stock winner that investors should own for many more years to come.
Sam Mattera (Electronic Arts): Video game publisher Electronic Arts was one of the single best performing stocks in the market last year. Boosted by the launch of the Xbox One and PlayStation 4, Electronic Arts shares doubled in 2014, and have continued to rally in 2015.
Electronic Arts isn't the bargain it was a year ago, but it may not be time to take profits just yet. The console cycle that benefited Electronic Arts remains in its infancy -- the Xbox One and PlayStation 4 have been on the market only a fraction as long as their predecessors. As more gamers adopt these platforms, Electronic Arts will gain more potential customers for its upcoming titles. Electronic Arts faces a lot of competition, but may be the most innovative major publisher. Last July, it launched EA Access, a first of its kind subscription service that allows it to monetize older content.
Led by its new CEO, Andrew Wilson, Electronic Arts is slowly turning around its poor image, and releasing higher quality games. Later this month, it will launch Battlefield: Hardline, and in December, it will benefit from the return of Star Wars with Star Wars: Battlefront.