Avoid These 5 Tech Stocks For Now

by: Investment Underground

By Blane Swenson

Even with the recent run-up in the market, tech stocks have been a mixed bag. Some companies like Apple, Inc. (NASDAQ:AAPL) have reported great earnings and just kept running higher. Others like Google (NASDAQ:GOOG) have dropped in price recently before recovering due to concerns about hiring and ballooning capex. In this article, I explore five tech stocks to get a clearer picture of this up and down sector. For this purpose, I chose five stocks that are poorly positioned for growth going forward. Here are the tech stocks I would avoid right now:

Baidu, Inc. (NASDAQ:BIDU) - At a recent closing price of $140, the company is trading in the high end of its 52 week range. The 52 week high of $165.96 was reached in July 2011, with the 52 week low of $100.95 occurring in September 2011. Market capitalization is approximately $49.17 billion.

The company had experience a nice run-up ahead of its earnings report on February 16th but fell after reporting a 50% increase in headcount over the last year to around 16,100. This means much higher capex going forward. The company is essentially where Google R&D was three years ago with the full implementation of details maps and email labs on the way. Options activity was notable with nearly 7,000 puts and 3,500 calls traded around the February $35 strike against open interest of about 7,000 and 8,000 in the puts and calls, respectively. Investors should keep a close eye on expenses but I expect significant headcount growth from a tech company in Baidu's position. A recent report stated that online advertising revenue in China was greater than that of print revenue for the first time ever. As advertisers continue to look to the web for various revenue ideas, this trend is expected to continue throughout 2012. In addition, company CEO Robin Li announced a new operations center in southern China, which will help to add overseas users and revenue. He also reported that the company is now the default search engine on over 80% of the Android handsets being built in China.

Not only has the company increased market share over its largest competitor, GOOG, but it also dominates other Chinese competition like Sohu.com, Inc. (NASDAQ:SOHU). Despite Baidu being far larger, operating margins of 52.53% are clearly superior to that of 33.07% for SOHU, and SOHU's profit margins of 19.10% also pale in comparison to 46.05% for Baidu. Despite respectable quarterly revenue growth of 42.20% for SOHU, it is still only half of the 85.10% year over year growth for Baidu.

Because of the nearly 30% rise since December, the stock seems a bit extended at this point. Avoid Baidu for the time being, looking for a pullback in the stock to around $138 to stick.

Sina Corporation (NASDAQ:SINA) - At a recent closing price of $68.12, the company is also trading near the bottom end of its 52 week range. Its 52 week high of $147.12 was reached in April 2011, and the 52 week low of $46.86 was seen in December 2011. Current market capitalization is approximately $4.49 billion.

With the company reporting to have over 100 million active users at this time, one issue appears to be how to generate revenue from all these potential customers. The company has delayed explaining how this revenue generation will occur twice in the past year alone. One reported problem is that the Chinese government is requiring users to register with their real names, threatening to limit access if this isn't done. Regardless of how this works out, the company is also expanding into other areas, such as online gaming.

The company reported a loss in its most recent quarter due to sharply higher marketing and engineering costs for the Weibo platform. This has hurt its profitably as compared to competitors like NetEase.com, Inc. (NASDAQ:NTES). Operating margins of 46.77% for NTES were much higher than the 12.26% reported for SINA, and NTES reported profit margins of 44.66% compared to a loss for SINA in the quarter. Year over year revenue growth of 39.80% for NTES is nearly double that of 20.40% for SINA. With the stock being in a downtrend for nearly a year, avoid SINA unless the stock breaks over $80, thus possibly beginning a trend higher.

Netflix, Inc. (NASDAQ:NFLX) - At a recent closing price of $123.07, the company has nearly doubled in price since its 52 week low of $62.37 reached in November 2011. The 52 week high of $304.79 occurred in July 2011. Current market capitalization is approximately $6.82 billion.

The company appears to have survived a public relations debacle last year resulting from an attempt to raise prices on U.S. subscribers by as much as 60%. It continues to rebound even as the company is reportedly paying much higher fees for video as well as initiating service in other parts of the world. Also, a recent settlement that reduced fourth quarter net income by 14% doesn't seem to have had much effect either.

The company will continue to see increased competition for streaming videos from online giant Amazon.com. (NASDAQ:AMZN). Despite being far larger, profitability for AMZN seems to pale in comparison to NFLX. Return on equity of 49.36% for NFLX is nearly six times that of 8.63% for AMZN. Return on assets of 11.89% for NFLX also handily beats the 2.44% return for AMZN. Year over year revenue growth for AMZN of 34.60% fares better, but still doesn't beat the 46.90% rate of increase for NFLX. With the stock currently in a bit of a pullback, avoid NFLX for now unless the stock trends higher over approximately $130.

Salesforce.com Inc. (NYSE:CRM) - At a recent closing price around $131, the company has also rebounded nicely off recent lows. The 52 week high of $160.12 was reached in July 2011, and the 52 week low of $94.09 was reached in December 2011. Current market capitalization is approximately $17.90 billion.

The company has recently closed a number of deals with customers in the United States and Europe, reportedly the largest ones for the company to date. In addition, the company has taken its purchase of Rypple in December 2011 and started to rebrand and expand it in order to better its already large customer base. Rypple will also be used to more directly compete with larger competitors like SAP AG (NYSE:SAP).

CRM's financial performance is a mixed bag compared to its much larger competitor SAP. Operating and profit margins for CRM are near zero compared to 29.27% and 24.17%, respectively, for SAP. Likewise, return on equity of 30.54% and return on assets of 11.81% for SAP also soundly outdoes the nearly zero return for CRM. Going forward, CRM's year over year revenue growth of 36.2% does beat the current 10.8% rate for SAP. Given the nearly 40% rise in the stock this year despite a lack of profitability, greater competition and concerns about the stock being in a bubble of its own, avoid CRM for more fairly valued opportunities.

Open Table, Inc. (NASDAQ:OPEN) - At a recent closing price around $44, the company is off the recent lows but still in the lower end of its trading range. Its 52 week low is $31.54 reached in November 2011, and the 52 week high of $118.66 was reached in April 2011. Current market capitalization stands at approximately $1.06 billion

The company just announced fourth quarter earnings and revenue numbers that were both better than consensus estimates. Going forward, there is concern that expansion will slow, due to increased competition from some smaller, privately owned companies and slower additions of restaurants to its program. Operating expenses are also expected to jump sharply in the upcoming quarter, which is consistent with prior first quarter periods. On the bright side, the company has been selected by Gordon Ramsay Holdings to be the provider of all their restaurants in the United Kingdom.

Current operating margins for the company are a respectable 20.8%, as are profit margins of 14.8%. Overall returns are also decent, with a return on equity of 17.03% and return on assets of 10.77%. Year over year revenue growth is currently at 20.8%, while year over year earnings growth is currently 36.1%. Having already risen around 50% from its November 2011 low, avoid this stock until the uptrend is continued with a break over $53.

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