3 Technology Stocks To Avoid, 1 To Buy

by: Chris Lau

A lack of a convincing resolution to Europe’s crisis, along with tighter capital requirements for banks around the world, is pulling down the share price in companies. Bank of America (BAC), which is often the most actively traded company on the New York Stock Exchange, closed below $5. Bank of America did not close this low (its intraday low $4.92 since March, 2009.

The stock price movement in banks is an important indicator for sentiment. Sentiment is clearly negative, as investors try to guess when the sector will “bottom.” In this environment, companies reporting strong results hold their share price value, but offer little short-term upside. Adobe Systems (ADBE) rose nearly $2 to $28 after reporting results. Ciena (CIEN) and Research in Motion (RIMM) sold off sharply after providing a weak outlook for 2012.

Even Zynga (ZNGA), which went public with an IPO (initial public offering) at $10, closed recently at $9.05. Although the company has a market capitalization of $8.9B, Zynga could have reached a higher valuation if it went public during the summer.

Zynga’s lackluster IPO suggests that “risk-off” will delay the “bottom” for both Ciena and Research in Motion shares. For this reason, Ciena, Zynga, and Research in Motion are clearly stocks to “sell.” Only Adobe Systems is a company to buy.

1) Ciena Corporation


Ciena reported earnings on December 8, with shares rising 3.2% premarket that day. Order flow was the strongest ever for the fourth quarter, and its operating profit rose 3.5%. Revenue was stronger for the second half of the year because the company is differentiating its position in the market place. The company hosted an education series discussion on December 15 to increase awareness of its products and services.

The $592M in cash ($6.17 per share) and free cash flow of 42M ($0.33 per share) support the argument that Ciena is approaching a bottom. Conversely, the company’s margin was around 3%, well below a 10-12% target. The company acknowledged that the company will not reach that margin target in 2012.

Ciena closed recently at $10.38.

2) Research in Motion


It takes humility and determination for company leaders to rise to the challenge of adversity. For RIM, adversity is three-headed: Google’s Android, Apple’s iOS, and Microsoft-Nokia’s Windows Phone. The co-CEOs, Balsillie and Lazaridis, showed some humility by accepting a token $1 salary. This is similar to Meg Whitman’s salary at Hewlett Packard (HPQ). Unfortunately, stock options and bonuses mask the nature of the $1 salary.

In the earnings report, RIM delayed Blackberry 10 because an integrated chipset for LTE in the U.S. will not be available.

The problem with this explanation is that Blackberry devices usually consume between 100-300 megabytes, so the competitive advantage for an LTE-based phone is minimal.

To drive-through Blackberry 7 device sales, RIM allocated $100M in advertising in the U.S. The problem with this strategy is that marketing will not address a competitive pricing problem. Even though the Bold 9900 device is a vastly improved one, the U.S. market is more receptive to the iPhone and the Android devices at the same price point. RIM is better off lowering the price of its premium devices and concentrating marketing efforts on $10 social plans.

RIM is down around $2.30 (or 15%) since its earnings announcement. A forthcoming takeover is cited as a reason to buy shares now, but this argument is flawed. Most companies cited as buyers are already committed to another platform and strategy. RIM would also be unreceptive in being bought out and stripped for parts. The owners would need to step away from day-to-day operations first before any notion of a sale is considered by speculative investors. The company would be better off going private and raising debt at very low cost to strengthen itself at a timeline that is not measured in quarters.

3) Zynga


Zynga’s rapid share price decline since its IPO indicates investors are not in the mood to make speculative plays. The collective sell-off in Zynga, Groupon (GRPN), LinkedIn (LNKD), and Pandora (P) indirectly illustrates further compression in price-multiples for the above-mentioned stocks.

4) Adobe Systems


Adobe reported strong earnings, reversing the negative news of layoffs and the abandonment of Adobe Flash for Mobile. The company earned $1.65 per share in fiscal 2011. It outlined its strategy of its Nitobi acquisition, continued growth in PDF in the corporate space, and a forecast for a strong upgrade cycle to its flagship Creative Suite (CS5.5 and CS6).

The company plans to buy back up to 300 million shares. The company aims to generate $1.5B in subscription revenues by 2015. To mitigate losses in software sales, the company is planning to sell perpetual software along with the subscriptions. Customer growth will come from the subscription side.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.