Technology Stocks: Why Investors Must Dig Deeper Into The Numbers

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 |  Includes: AAPL, FB, GOOG, MSFT, TWTR, YHOO
by: Justin Giles

Technology companies have a lot more in common these days then you might think. Over the years we have seen companies such as Apple AAPL, Facebook (NASDAQ:FB), Google (NASDAQ:GOOG), Microsoft (NASDAQ:MSFT), Twitter (NYSE:TWTR) and Yahoo! (NASDAQ:YHOO) just to name a few, come together with regards to patent reform and many other hot topics.

On Monday, these companies again formed an alliance that calls for reform of government surveillance practices worldwide. The companies urged the U.S. to take the lead by reining in unnecessary surveillance by the National Security Agency.

"We understand that governments have a duty to protect their citizens. But this summer's revelations highlighted the urgent need to reform government surveillance practices worldwide. The balance in many countries has tipped too far in favor of the state and away from the rights of the individual. ...it's time for change."

After the announcement was made, shares popped as investors were delighted with the news. Twitter seemed to benefit the most as shares have surged since the beginning of the week. Shares reached an all-time high of $53.87 Wednesday, on above average volume. Twitter has also benefited amid rumors that Carl Icahn has been buying shares of the Company. This goes along with news that Twitter is testing its new targeted ad platform to curb rising costs and boost revenues.

Nevertheless, there are many things that investors need to look at then just the current stock price. Looking at just the market capitalization of a company or stock price won't tell you which stocks are underpriced and which one's are overpriced. Just look at the table below.

Zynga Groupon Facebook Twitter Priceline
Stock Price $4.05 $10.14 $49.38 $52.34 $1,178.11
Market Cap $3.3B $6.8B $121.2B $29.1B $60.6B
Click to enlarge

*Prices reflect the closing prices as of December 11

Whiles shares of Twitter are worth more than shares of Facebook right now, looking at the market capitalization we can see that Facebook is still worth more than 4X then that of Twitter. Looking at Priceline, we can see that shares are 24X more expensive then shares of Facebook. Yet, Facebook is still worth exactly 2X as much as Priceline.

That's why it's important to look deeper into the numbers when doing your due diligence about a company. Many things should be looked at such as a company's cash levels, growth rates, debt, consumer trends etc. These numbers will give you a better idea about where a company is right now and where they are headed.

Zynga Groupon Twitter Facebook Priceline
Cash $1.1B $1.1B $2.1B $9.3B $6.5B
Debt $0 $0 $185M $575M $2.3B
2013 Sales Growth -38% 8% N/A 49% 28%
2014 Sales Growth -10% 14% 74% 36% 23%
Price-To-Sales Ratio 4.66 2.69 45.5 15.8 8.95
Forward Price-To-Sales Ratio 5.20 2.34 26.4 11.7 7.24
P/E N/A N/A N/A 126.6 33.9
Forward P/E N/A 40.5 N/A 44.1 23.1
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*Prices reflect the closing prices as of December 11

Looking at the table it becomes more clear about which stocks are currently undervalued and which stocks are overvalued. Let's not stop there though. If we break it down even further we can see how much users are valued at each company.

Twitter Facebook LinkedIn Zynga
232 Million Monthly Users* 1.19 Billion Monthly Users 259 Million Total Users 133 Million Monthly Users
Share Price: $52.34 Share Price: $49.38 Share Price: $231.41 Share Price: $4.05
Mkt Cap: $29.1B Mkt Cap: $121.1B Mkt Cap: $27.6B Mkt Cap: $3.3B
User Worth:$125.4 User Worth:$101.7 User Worth:$106.5 User Worth:$24.81
Click to enlarge

Looking at the table we can see that Twitter's users are valued more than 5x then that of Zynga, and a lot higher than FB and LNKD as well. What also stands out is Twitter is still not even generating a profit like Facebook and LinkedIn have shown.

So the question becomes, should Twitter users be valued that high and should Zynga's users be valued that low? Looking at all the facts, the market certainly seems to think so. While the two companies certainly operate different platforms and business strategies, we can still draw some comparisons to better evaluate our potential investments.

If Twitter's users were valued at the same price as Facebook's users, Twitter would be valued around $23.6 billion or $43.32 per share. This would represent a decrease of around 17% from current prices.

If we switch that around, and value Facebook's users at $125 (Twitter's users), Facebook would have a market capitalization around $149 billion and shares would be worth $60.81 per share. This would represent an increase of over 20% from current prices.

Conclusion

Not all investments are created equal. Some stocks tend to be more volatile than others. Some stocks will have high institutional support and others will not. Some companies have low floats while others do not.

That's why it is extremely important to look at more than just a couple of factors when looking to get into a stock (long or short). By doing your proper due diligence and digging deeper into the details, you are taking the necessary steps to put yourself in the best possible situation.

Knowing who you can trust in the market is very important. That's why I'm providing you with my track record and other particular stocks that I like. The link provided will show you all of my picks, how they have fared, and where I think they will be going in the near future. I think you will find my track record to be very impressive and useful.

Disclaimer: Investors are always reminded that before making any investment, you should do your own proper diligence on any stock mentioned in this article. Have a great day and as always, I look forward to hearing your thoughts or questions that you might have.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.