Small-cap tech stocks have a reputation for being risky investments, but the same goes for large-cap tech stocks. Over the years, seemingly invincible companies like Hewlett-Packard (HPQ) and Nokia (NOK) — have plunged in value.
If anything, the current environment may pose even more risks for large-cap tech stocks. First of all, the soaring U.S. dollar has crimped margins and has made it more expensive to compete in foreign markets.
But it’s also harder to find new avenues for growth as markets begin to mature. Actually, this is a key reason for the surge in M&A, leading to more than $110 billion in deals for the year so far.
So what tech stocks look vulnerable right now? Workday (WDAY), Twitter (TWTR) and LinkedIn (LNKD) top my list at the moment. Despite being plagued with tough issues, all are trading at high valuations, which makes them particularly vulnerable.
Let’s take a look at each of these large-cap tech stocks to sell or short.
Tech Stocks: Workday (WDAY)
Workday (WDAY) is a top provider of human capital management cloud software, which helps companies manage payroll, benefits and personnel. The company currently has more than 925 customers, including biggies like Coca-Cola (KO).
Over the years, the company has been able to pump out strong growth. Since 2009, revenues have spiked more than 30x — from a meager $25 million to $788 million last year.
Yet the company looks to be on the verge of a deceleration. According to the latest earnings report, the billings for WDAY grew at only a 31% (on a year-over-year basis), down from 65% in the prior quarter.
There are several reasons for this deceleration. For example, it looks like the company is struggling to get traction with its financials software. This kind of technology can be a tough sale since companies usually don’t want to disrupt their current operations.
But perhaps the biggest headache for WDAY is the competition from mega players like Oracle (ORCL) and SAP (SAP). They have been moving more aggressively to the cloud and getting more price competitive. In Workday’s most recent earnings call, CEO Aneel Bhusri even alluded to the fact that ORCL is becoming a worthy rival.
However, even though WDAY stock has taken a hit, the valuation is still at nosebleed levels, trading at about 17 times sales. In comparison, Salesforce (CRM) is trading at about 9 times sales and NetSuite Inc (N) only trades at a multiple of 12.
Tech Stocks: Twitter (TWTR)
Recently at a tech conference, journalist Kara Swisher asked Twitter (TWTR) CEO Dick Costolo if he would still have his job by the end of the year. No doubt, this is the kind of question that should stir concern with investors.
Making matters worse, Costolo seemed far from confident with his answer.
TWTR stock has been a wild ride because of the volatility in the core business — and there is little evidence that things will improve anytime soon.
Just look at the recent earnings report: TWTR reported revenues of $436 million for Q1, well below the Wall Street estimate of $457. The guidance was also disappointing, at a range of $470 million to $485 million, well shy of consensus estimates for $538 million.
None of this should be a surprise. After all, TWTR is still struggling to grow its user base. In Q1, the year-over-year increase was 18%, which was down from 20% in the prior quarter. On the earnings call, Costolo noted that April got off to a slow start (but didn’t bother to quantify just how slow).
This slowdown has happened despite the company’s focus on product innovation, such as introducing native video and better direct messaging. There was also the launch of a live-streaming app, called Periscope, which has caught fire.
Despite all this, TWTR’s core platform is still far from intuitive, and the path to consistent profitability remains unclear.
True, TWTR stock has already dropped by a quarter during the past three months. But the valuation is still far from cheap, with a forward price-to-earnings ratio of 55. To put this in perspective, Facebook’s (FB) multiple is a much more reasonable 30.
Tech Stocks: LinkedIn (LNKD)
LinkedIn (LNKD) has been a model of consistent growth — until recently, that is.
In Q1, the company issued very weak guidance, with next quarter’s revenues expected to range from $670 million to $675 million and earnings to come to 28 cents per share. But analysts were expecting revenues of $719 million and earnings of 74 cents.
This probably isn’t a short-term problem for LNKD stock. Full-year guidance fell to $2.9 billion, down from the prior guidance of $2.93 billion to $2.95 billion.
What’s happening? Well, currency volatility has certainly been a big issue (about 40% of revenues come from overseas markets). But even more worrisome is the sudden fall in display advertising. This is part of a major trend in the industry as budgets are starting to move rapidly toward automated solutions. Unfortunately, LNKD has been slow to adapt.
The company is also having problems with its recruiting business, which is the largest source of revenues. There has been more churn, leading the business to be less effective … yet, on the earnings call, management was vague on the reasons. That’s never a good sign.
Sure, LNKD stock took a massive hit after that earnings report, falling 20% in one day. But the forward PE ratio is still 61. If there is another quarter of weakness, LNKD stock could see even more pressure on the downside.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.
