By Thomas Hughes
Oracle (ORCL) stunned the world when it released earnings last December. It called the entire technology sector to attention. Weak sales and a lower outlook took its toll on the share price, pushing the stock down more than 10%. Other technology stocks have been suffering as well, as increased competition and disasters have helped to hurt prospects in 2012. Overall, the entire sector is looking at another tough year ahead. In the following article, I will discuss four tech stocks to avoid in 2012. These four stocks are Electronic Arts (EA), Research In Motion (RIMM), Micron Technology (MU) and Oracle.
Electronic Arts' recent earnings release for Q3 of 2012 was a big surprise for the markets. The company beat earnings expectations and posted its largest operating cash flow number in nearly eight years. Three of the game maker's top titles made major milestones in 2011. Battlefield III and FIFA 12 each reached sales of over 10 million units. Star Wars: The Old Republic surpassed 1.7 million subscribers. Origin, Electronic Arts' online gaming hub, generated over $100 million in 2011. The hub, formerly known as the EA Store, allows users to download games to their PC's or other game platform. The game maker was number one in market share among western markets. European market share grew by 3% to peak at 20% overall, and in North America, market share grew by 1% to peak at 17% overall. Social network gaming, including Popcap, which joined Electronic Arts in August, made significant gains as well. Popcap also increased its own revenue by 30% over the previous 12 months.
Full year 2012 revenue, scheduled to be released in April, is expected to be in the range of $1.45 to $1.59 per share. Revenue is up from last year and total loss per share is significantly less. The stock is currently trading around $19, which is perplexing to me. Yes, the company generates cash, but it's not making any profits. The popularity of titles is not enough to keep the share price up and keep investors interested. Recent trading prices suggests a renewed round of selling is on the way. There are much better stocks to hold in the gaming world. Zynga (ZNGA) is expected to make profits in 2012, and has room to increase revenue through ad sales. I believe the company will also ride the Facebook (FB) IPO to the top.
Research In Motion has been facing tough headwinds. While earnings did grow in 2011, the company still felt the need to change management. New CEO Thorsten Heins says the company is focused on delivering new technology in 2012. The ailing Blackberry operating system is losing out to Google's Android and Apple's iOS systems. Heins says that Research In Motion is on track to deliver its upcoming Blackberry 10 system. Research In Motion will continue to face challenges from Apple and other phone makers using the Android system. Device quality will need to improve to match the competition, along with significant improvements of features.
Research In Motion is currently trading around $16.50, near its five year low. The stock has been trending downward since its post recession peak in 2011. Competitors Apple (AAPL) and Verizon (VZ) have both trended upward in that time and Apple, at least, is making huge profits. The iPhone is a much better device than the Blackberry, and Android users are not limited to one choice of device, a feature helping Verizon and other makers of smart phones.
Micron Technology has recently suffered a major tragedy that could impact the company's future outlook. Steven Appleton, who had been the company's CEO since 1991, and employee since 1983, was killed last week while piloting a small plane near company headquarters. Mark Durcan, who had been scheduled to retire this year, was appointed chief executive. Mr. Durcan has made a commitment to the board of directors and shareholders to stay on and help move the company forward.
Micron has lost money the last two quarters, but managed to post a profit of $.17 per share for 2011. Micron is spending money on capital investment and currently has over $2 billion in cash and investments. Net sales were down and net costs were up, while Micron spent money making improvements to its core business. The company competes with Intel (INTC) for market share, but only holds a small percentage in comparison. Sales of semiconductors are supposed to remain strong in 2012, but the ever evolving Greek debt debacle could seriously hurt the company's future outlook. The stock looks weak, as it has been hitting a ceiling in recent trading sessions.
Oracle disappointed the markets last December when it missed earnings and lowered its 2012 outlook. The move followed a similar announcement by Texas Instruments the previous month. The stock lost nearly 15% in after market trading on heavy volume sparked by the announcement. Investors were not ready for that kind of news from such a big name, which put the coming new year into perspective. Since then, fears of global slowing, higher oil prices, and lingering uncertainties over the European debt crisis have become realities.
The stock is currently trading around $29, a few pennies higher than the pre earnings announcement price. Oracle blamed the weak earnings on cutbacks in business spending, and so far I have not seen any evidence to the contrary. Competitor Redhat, Inc. (RHT) is in a similar situation. The company's 2011 earnings failed to convince traders that 2012 would improve financial results, and there is no reason to expect a surprise at this time. I have always liked Oracle for options trading. The stock has lots of resistance and usually trades along fairly predictable lines. Additionally, the stock has good volume and high open interest. I believe the stock will only go sideways this year.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.