The tech sector has been a standout so far in 2017, with the Technology Select Sector SPDR Fund (XLK) rallying more than 20% from the start of the year to a 52-week high on Monday. It’s also been strong this earnings season, outperforming all other groups with 69% of its companies beating estimates. However, tech stocks’ day-after performances tell a different story.
Throughout the market, the average stock’s one-day change after reporting earnings was -0.64%. But the average loss for a tech stock is much larger at -1.55%. Those names that reported an earnings miss lost an average 5.3% in one day, and even those that beat expectations closed with a loss of 0.1%.
Now I’m the first to say that this sort of unwarranted selling should be considered a buying opportunity, but that logic doesn’t always apply across the board. Today, I’d like to talk about two tech stocks you should keep your distance from.
1. Twitter (TWTR)
Twitter released its second-quarter numbers on July 27, beating on both the top and bottom lines with earnings of $0.12 a share and revenue of $574 million. Wall Street had been expecting earnings of $0.05 a share on revenue of $536.7 million.
However, because the company saw disappointing results in two of its key metrics, the shares fell 14% the day of the report and have continued to decline since.
Twitter relies heavily on users and advertising revenue, and both figures came in below expectations. Monthly actives users (MAU) were flat at 328 million, which suggests that the company’s growth phase is likely over for now, and advertising revenue actually fell 8% from $535 million last year to $489 million.
This is an extremely troubling scenario because without a growing user base and increasing ad revenue, where is the catalyst to keep this stock moving higher? And when Facebook (FB) recently reported adding 70 million MAU and Chinese competitor Weibo (WB) is growing its user base by 28%, what is to entice an investor to buy TWTR over these other names?
Not even the fact that the president of the United States is using Twitter as his main media outlet has been enough to help this stock. At this point, I don’t see any salvation for this company unless it is eventually bought out by a larger tech name.
2. Snap (SNAP)
Snap, the parent company of social media platform Snapchat, released its quarterly numbers after the bell on Thursday. Very little about this report was encouraging, and therefore the stock traded down double digits to a new all-time low.
The company lost $443 million in the second quarter, about 4X the loss from one year earlier and worse than analysts had predicted. While seven million new daily active users were added – bringing SNAP’s total to 173 million – this number also fell short of expectations. Snapchat’s closest competitor, Instagram, which is owned by Facebook, recently hit 250 million daily users in its Snapchat-like Instagram Stories feature.
A company can survive when it is losing money but still growing its user base, but that isn’t the case with Snap. Losses are mounting, and without growth there to increase its amount of users I do not believe there is any reason to own this stock.
Add in the fact that Friday’s huge move to the downside has resulted in a new all-time low and buying now is like trying to catch a falling knife.