by Jim Woods | May 14, 2014 2:51 pm
The Dow is at a new all-time high, as is the S&P 500. The Nasdaq Composite and the large-cap tech stocks found in the Nasdaq 100 … well, that’s a different story. Both of these indices are well off their all-time highs of some 14 years ago. More recently, the past couple of months have been particularly hard on techs, with the QQQ down 2.8% since its March high.
The selling in the sector, including some of the biggest bellwether tech stocks of the past several years, has caused many shareholders to wonder if once-mighty champions have now suffered a crushing blow from the right hand of rotation into sectors such as energy, industrials and even Treasury bonds.
Understandably, some of the biggest and most widely held tech stocks have been reeling, but is this a reason to run the other way, or should investors be jumping into some of the biggest and best beaten-down companies before they make a victorious comeback?
Here are three tech stocks that will come off the canvas and fight their way back to victory.
The online seller of everything has been one of the greatest corporate success stories ever, and one of the greatest tech stocks in Wall Street history. For so many years, CEO Jeff Bezos’s formula of pouring nearly every dime of revenue back into Amazon (AMZN) at the expense of a strong bottom line (or a dividend to shareholders) was embraced wildly by investors of all stripes.
Recently, however, Amazon saw a decline in Q1 operating income due largely to a substantial 28% increase in shipping costs worldwide. The news was interpreted as a big negative for AMZN stock, and the result was a ramped up decline in the shares, which have plummeted more than 10% since Apr. 24.
In fact, AMZN stock has really taken it on the chin in 2014 — down more than 24%, year-to-date.
Yet for Amazon, Jeff Bezos, and anyone who is a long-term investor, I think AMZN stock here at the $300 level represents a battered bargain that can lead you up the river toward some very big profits in the years to come. How big are the potential gains? Well, consider that over the past five years, AMZN stock has posted a total return of more than 300%. I’d say that kind of gain deserves championship accolades.
Video streaming service Netflix (NFLX) has basically changed the way we consume entertainment, and the impact the company is having on the entire old guard media delivery mechanisms has been both revolutionary and ridiculously rapid. I don’t know anyone who doesn’t regularly “binge watch” TV series such as House of Cards or Breaking Bad, and one of the only ways to do this is via Netflix.
Now, for the past five years, investors have been binging on NFLX stock, which has posted a five-year total return of more than 800%. Yes, that ride has been fraught with a lot of volatility, but like any good TV action hero, NFLX stock has proven it can overcome adversity. The latest round of dings has come since NFLX stock hit its March 4 high. Shares are down some 23% since then, partly due to the wider selloff in tech, but also due to talk of competition from a new streaming service created by powerhouses Apple (AAPL) and Comcast (CMSCA).
The way I see it, competing tech stocks had better get to it soon, because news today from network services firm Sandvine revealed that Netflix continues to increase its share of fixed-line web traffic in North America. A Sandvine report said that, so far in 2014, Netflix has accounted for 34% of data flowing to consumers during peak times (a 2% bump from the second half of 2013).
The growth of Netflix is a trend that shows no signs of abetting anytime soon, and if the company can execute in markets such as Europe, NFLX stock could easily bounced back into the $450 range — about a $100 (nearly 30%) higher than its current price level.
The juggernaut electric carmaker Tesla Motors (TSLA) is not only an auto manufacturer; it’s also a huge technology play. CEO Elon Musk has proven himself to be the kind of leader that inspires confidence, and more importantly big profits, for TSLA stock investors. That confidence, alongside the impressive revenue and earnings Tesla have brought in, has driven TSLA stock to an 900% gain over the past five years. So far in 2014, TSLA stock is up nearly 28%, and that’s despite a recent slip of 25% since the stock hit its most recent high on March 4.
The latest round of selling in TSLA stock came despite what I think was a strong Q1 top- and bottom-line that beat expectations. Still, Wall Street took the opportunity to “sell the news” in TSLA stock, and the result was a steep drop in the shares on May 8, one day after the company’s earnings reveal.
I suspect TSLA stock is one of those situations where, in order to keep jolting higher, Tesla has to come in with outrageously impressive revenue and earnings. Simply coming in with good numbers is likely going to be met with more sell-the-news trade, and that’s certainly understandable after such a massive run in the stock.
But if you are looking for a true champion that dominates a niche market, and one whose market penetration is just now getting started, then there is no denying the ability of Tesla to come roaring back to victory.
Expansion in China is just one of the near-term catalysts that could give TSLA stock another major spark, but then there’s the planned release of the company’s Model X, as well as a lower-priced version of the Model S sedan. Production of these vehicles will be possible thanks to Tesla’s new battery “Gigafactory,” which it plans to invest about $4 million to $5 million to create.
The bottom line here is that Tesla, and TSLA stock, will almost certainly be much higher in the years ahead than it is right now. That means the latest 25% pullback is your opportunity to take this profitable ride at a discount.
As of this writing, Jim Woods was long AMZN, TSLA.
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