(The opinions expressed here are those of the author, a
columnist for Reuters.)
By Conrad de Aenlle
LONG BEACH, Calif., July 1 Many tech companies
saw their high-flying stocks lose altitude this year.
Leaders in social media like Twitter Inc. and
LinkedIn Corp. fell more than 40 percent from their
2014 highs. Others, such as the retailer Amazon.com Inc.
, took more modest drops, although shareholders might
not have found them modest at the time.
These stocks, among others, are cheaper than they were, but
are they cheap enough? They almost certainly can't be considered
bargains by normal valuation yardsticks. Their price-earnings
ratios - when there are earnings - can run close to or into
Portfolio managers find, however, that some businesses offer
sufficient growth potential to warrant bets around current
prices. Kevin Landis, manager of the Firsthand Technology
Opportunities Fund, has been adding to his position in
Twitter, a longtime holding, because he expects the stock to
improve over the long haul as the company evolves from an
upstart held in tech portfolios into a respectable blue chip
that will be far more widely owned.
"It's only a matter of time before Twitter goes into the S&P
500," says Landis, a Silicon Valley investor since the days of
CompuServe email addresses composed of long strings of numbers.
"Like Google 10 years ago or Facebook two years ago, everyone
will have to own them."
The reason that Twitter plunged in the first place, losing
more than half its value, is that investors pulled back ahead of
anticipated selling by corporate insiders. Many feared a massive
dumping of Twitter stock once the lock-up period from the
company's November initial public offering ended. That has
abated, Landis says, and the stock "really looks like it has
found a bottom."
Landis also holds Google Inc. along with Facebook
Inc., which has nearly quadruped in value since late
2008, but he's having reservations about the latter. Landis
questions how much growth potential Facebook has left and warns
that he may sell before the year is out.
"I'm still happy to hold it, but at over $160 billion [in
market value], how much can it possibly make in the next 10
years?" he wonders. "I don't know that we'll hold it forever."
Landis has no such misgivings about LinkedIn, a social-media
company for professionals. He remained invested through the
recent plunge and believes that the stock is worth buying today.
"We own it and would consider adding to it," he says. "It's
a top brand. It's hard to imagine a scenario where LinkedIn
fades from view." The $110 million Firsthand Technology
Opportunity is up an annualized 20 percent in the five years
through June 27, according to Lipper, a unit of Thomson Reuters.
The fund has an expense ratio of 1.85 percent.
John Toohey, head of equities for USAA Investments, which
offers the $571 million USAA Science & Technology Fund
, has similar opinions about Facebook and LinkedIn,
Facebook, a holding in several USAA portfolios, including
Science & Technology, is the one with the greater growth
potential, in his view, because its everyman customers are more
tolerant of having ads thrust in their faces than the
professionals who use LinkedIn.
"They have huge opportunities to monetize their base,"
Toohey says about Facebook. Still, he encourages the company not
to be greedy by saturating the site with ads or allowing ads
that are targeted so precisely to users that it becomes obvious
just how much information the company has on them.
"People are fine being marketed to," Toohey says, "but they
need to strike a delicate balance."
AMAZON'S BALANCING ACT
Amazon.com, whose stock fell more than 25 percent earlier in
the year, may need to execute a balancing act of its own. Amazon
has spared little expense in growing its business to become a
dominant retailer, but companies that spare little expense tend
to have thin profit margins and generate anemic cash flow,
Toohey notes. USAA Science & Technology delivered an annualized
return of 21 percent in the past five years. The fund's expense
ratio is 1.34 percent.
"We own some Amazon, but we're cautious about it," he says.
"The challenge is whether they'll ever slow down spending to
ramp up cash flow and margins."
Another possible impediment to Amazon and its shareholders
is that it sends out so many packages at such short notice that
delivery services like FedEx Corp. and United Parcel
Service Inc. eventually may balk at doing the heavy
lifting, at least at current prices.
"Amazon could shoot themselves in the foot," Toohey warns.
"If FedEx and UPS are going to be able to support all that
volume with two days' notice, they'll have to hire people and do
logistics. Are they going to get paid for it?"
Prospective buyers of tech high fliers may be asking
themselves the same question. Recalling the 2000 crash, Landis
concedes that investors can get hurt in companies like these,
but he highlights a difference between now and then - a dearth
of opportunities for growth in other assets.
"After a long bull market, there's nothing to go back to,"
he says. "When people take money off the table and look around,
they see that gold is played out, at least for now; there's not
much [to make] in bonds, and stocks of old-guard companies
aren't growing that fast. You can go for dividend yield or you
can go for growth."
(Follow us @ReutersMoney or here
Editing by Lauren Young and Cynthia Osterman)