By Richard Saintvilus
While the first quarter of 2013 was met with great optimism, it seems "panic" has become the theme for the second-quarter. While it's crazy to expect that the market's robust performance will continue infinitely, I'm nonetheless amazed how quickly investor sentiment has shifted.
Nevertheless, there's no point in fighting the tide when profit-taking become imminent. As such, here are a few stocks that should see some declines, especially since their valuations have surpassed their relative performances.
Although shares of BlackBerry have slowed down recently, the stock is still more than 140% above its 52-week low of $6.22. While BlackBerry has indeed made progress since escaping the grasp of failed leadership, the company still faces a daunting task trying to regain its position atop the mobile food chain.
It's just not going to happen, especially considering that the company does not really know what it wants to be. For instance, in its recent quarter, the company posted $2.7 billion in revenue, which is down 36% year over year from $4.2 billion -- it's a glaring decline. But I'm willing to give BlackBerry credit for having slowed the pace of the decline on a sequential basis.
It's a fair way to look at the glass-half-full. Then again, it's a bit premature to believe that this company is back to growth. The new phones are selling well -- exceeding expectations -- reaching 1 million units, or almost 10% higher than Street estimates of 915,000.
Unfortunately, the new phone could stop 3 million subscribers from churning out of the company's once-dominant service. This is the second consecutive quarter during which the company saw subscriber defections after peaking at 80 million last summer.
The service business, which has been BlackBerry's highest margin segment, has been the differentiator from Apple and Samsung. But now it is eroding. Given BlackBerry's grim chances of topping Apple or Samsung in hardware, the stock is likely to erode along with the service business.
I think Netflix has tremendous long-term potential. But strictly from a valuation standpoint, the stock needs a breather here. Over the past six months, the shares have soared from $54 to as high as $197, or 265%. Granted, the stock has slowed down recently and has fallen to $166 per share. However, this still represents gains of more than 207%.
Netflix also helped itself immensely in its recent quarter. Not only did the company beat its revenue number by posting $945 million (up 8% YOY), but Netflix surprised the Street with a profit of 13 cents per share, while analysts were expecting a double-digit loss. Impressively, Netflix continues to grow subscribers at an impressive rate - adding 2.05 million domestic streaming subscribers plus 1.81 million outside the U.S.
Better still, improving margins were seen across each reporting segments. This includes on a consolidated basis, which takes into account certain unallocated costs. Expenses continue to be concern however - albeit not as glaring. The company reported a 2.7% increase in marketing expenses and technology costs were up 1.7%.
What's more, the company showed impressive cost management as operating expenses declined 30%. You might say, we're nuts to recommend a sell here, given Netflix's strong fundamental improvement. However, it's about managing the risks. Given that Netflix has already rewarded shareholders, the odds are tough that it will duplicate another surprise.
(To see another SaintSense opinion on NFLX, click here.)
By every measurable standard, Amazon's stock is expensive - there's no way to spin this. However, though, this is not an indictment on the company's business or its leadership. Besides, Amazon has been expensive for almost a decade, including gains of more than 250% over the past five years. And if fourth-quarter earnings were any indication, this company has no plans of slowing down.
Growth is what Amazon shareholders are paying for. In that regard, Amazon delivered 22% higher year over year. This continued its streak that spans six quarters where the company's revenue growth has averaged 30%. In the most recent quarter, unit growth was up 32% year over year, while media revenue was up 10%.
However, despite the company's impressive growth and margin improvement, the prudent thing to do here would be to trim some off the top and lock in some profits. While Amazon is indeed a strong brand, the company can't defy gravity forever, especially with overall market sentiment beginning to sway.
It's also worth mentioning here that Amazon did miss top line estimates of $22.26 billion, while falling 6 cents short on consensus earnings per share estimates. And for a company that's heavily criticized for its bottom line, that net income dropped 45% year over year was also a major concern. That is to say another earnings miss and the Street may not be as forgiving.
Here's making sense
Each of these stocks are in separate categories - meaning, while valuation is the thesis of my sell recommendation, I am not suggesting that these companies are poorly managed. In fact, that's quite the contrary as each has made significant fundamental improvements.
With BlackBerry, however, its market position still remains grim. Regardless of how well the phones perform, I just don't see the compelling reason to switch from another device. The company can't survive solely on the support of existing BlackBerry users, especially with the service business on the decline.
To that end, I still feel that its best outcome is through an acquisition I've made this point recently and it's worth mentioning here, Microsoft (MSFT) should make a play for BlackBerry. For that matter, I think Oracle (ORCL), which has been on a acquisition spree, makes a great partner along with Cisco (CSCO), which is always looking for ways to leverage is enterprise position.
Additional disclosure: SaintsSense is a team of financial writers. This article was written by Richard Saintvilus, founder of SaintsSense. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.