The "four horsemen" of the tech stock world ran an unusual race last year: Everybody won.
Not anymore. Apple, Amazon, Google, and Research in Motion, handed their apocalyptic moniker by CNBC Mad Money's Jim Cramer, have all been hobbled in 2008.
Investors, fleeing higher-risk tech stocks in the face of a possible recession, are scaring an awful lot of money out of some of the biggest stars in the sector. With most investors still unwilling to call a bottom to the current round of selling, it's a safe bet the four won't be running in a fast pack together anytime soon.
So which has the best shot at regaining the lead once investors stop shunning tech?
Google: Still on Top
Look no further than Microsoft's $42 billion bid for Yahoo for proof that today's clear winner in the search and online advertising world is Google, the company everyone is trying to beat. If anything, Microsoft's bid highlights just how valuable the online advertising business truly is and just how far ahead Google has managed to run.
The bullish case for the company remains its dominance of the online advertising market.
Google's share is huge and growing, thanks in part to its more than 60 percent world market share in search. The company's online ad revenue is double that of No. 2 Yahoo, and executives have said slowing in the economy hasn't translated into slower ad revenue growth. Yet the company has taken the same hit in this market as its peers, and analysts say roaring back to that near-$750-a-share mark reached last November could be tough. It could regain that ground, but the second time probably won't be as easy as the first.
While advertising dollars are continuing to flood online from most other parts of that market, analysts note that margins could be hurt a bit if broader ad spending slows down. Analysts were cheered when Google's CEO said the company isn't seeing slower revenue because of the weak economy, but they note the same might not be true for some of its partners like MySpace, which have revenue-sharing agreements with Google that could weigh on margins.
"What people are really concerned about is Google's falling margins. [The fourth quarter] was the first time Google missed in both the top and the bottom line," says Jeffrey Lindsay, an analyst with Sanford Bernstein. Operating margins fell to 29 percent from an expected 32 percent in the fourth quarter. Lindsay still calls Google a strong buy with a 12-month price target of $750 a share—a few leaps above its current price of around $530 but below an $850 target price that Bernstein cut after Google missed fourth-quarter earnings estimates by a penny. Revenue growth for paid clicks has slowed faster than expected as well.
Quarterly performance aside, Lindsay sees some other near-term catalysts Google investors should consider. First, he posits the stock could bounce if Google fails to win a costly wireless spectrum auction. It's a deal that could set the stage for another surge in revenue if the firm succeeds in the mobile market but one that could cost billions up front. Another catalyst could be the approval of its merger with ad firm DoubleClick, now being debated in the European Union. Plus, keep an eye on Google's video and mobile businesses, which are ramping up this year as well.
As for the rest of the horsemen, the threat of slower consumer spending is more of a threat.
Amazon: Trouble at the Margin?
Let's start with Amazon. First, the good news: Its recent $300 million deal to buy online bookstore Audible and other efforts to build up its own online music store could create a new challenger for iTunes—eventually. In 2007, its shares doubled as the company solidified its spot as a true giant in the online retail sector. Now, though, analysts worry that the company is facing narrower profit margins as it offers discounts to entice shoppers growing thriftier by the month. Like most other retailers, Amazon has upped its discounting and other incentives to keep customers coming back, analysts say.
"Amazon lulled investors into a false hope they'd turned the corner on margins. They're really leading with heavy promotional activity to drive revenues, and there's no inkling that that's going to change anytime soon," according to Ryan Jacob, who runs the $60 million Jacob Internet Fund. After passing $100 a share last year Amazon has slumped back to around $73. Standard & Poor's, which rates Amazon a hold, sees the firm's 2007 sales slowing to around 30 percent after a 39 percent gain in 2007. SEC filings released last week show that Bill Miller's Legg Mason Capital sold off a quarter of its Amazon shares in the fourth quarter.
Plus, last week one of Amazon's data centers (used by small start-ups to crunch numbers) went down, which seems to be happening a lot lately among the horsemen.
Research in Motion: High End but Holding Up
On February 1, E-mail went down for three whole hours on BlackBerrys across North America. But the price of shares of Research in Motion, maker of the popular hand-held devices, barely budged. Traders gave the firm a free pass that day, apparently unfazed by one of Research's key advantages—a stellar, secure network with better service and support than those of rival services.
That's why the company is Wall Street's choice in hand-helds, even as the firm moves with some new success into the consumer market. RIMM's Pearl and Curve models are selling well among smartphone buyers and its shares have held up better than those of the other horsemen through this decline.
"We got a sense from U.S.-based telecom carriers that there was continued growth in the smartphone market as consumer offerings. Despite what we're hearing and seeing from some companies, it doesn't appear to us Research in Motion is being hurt at all by the economic slowdown," says Todd Rosenbluth, an equity analyst with S&P. He sees earnings growing 25 percent annually for the next three years, with a 12-month target price for the stock of $110 after a late January upgrade. It trades at around $96 today.
Apple: Gadgets Help, but What About Those Computers?
The Wall Street darling soared to $200 a share right around the end of 2007 before slumping to around $128 today. This year, Apple's Trojan horse (the tactic, not the virus) could be sales of its core computers. Its penetration of the U.S. market is small but growing fast.
If more users continue to move away from PCs (where a poor response to Microsoft's Vista and a dearth of Mac-quality design by the likes of Dell continue), Apple could score earnings surprises, analysts say. Bear Stearns notes that in the December quarter, unit shipments rose at "nearly three times the market growth rate." Citigroup analysts say Apple could beat earnings estimates by a dime in the March quarter on those sales, plus lower memory costs.
More broadly, given the success of Apple's iPods, iPhones, and stylish laptops, most analysts see current weakness in the stock as a bit overblown. While Apple hasn't had a perfect run lately—a good number of iPhone customers are hacking the handset to work on networks where Apple doesn't get a share of the revenue, for example—even lowered estimates are well above the current share price. Plus, earnings remain solid. In the first quarter, the company chalked up its 19th straight forecast-beating period.
What Really Matters for Tech
Unfortunately, even the best of the four horsemen won't be able to regain their 2007 status if the economy goes into a tailspin. Broadly, if the slowdown gets worse, everything from online book sales to advertising spending to demand for high-end handsets will very likely feel the pinch. Wall Street in general is on edge these days, and if these four horsemen hit a muddy patch, it'll be tough for any of them to make the sort of headway that will rekindle adoration for riskier tech investments.
"A [company like] Google is still doing exceptionally well," says fund manager Jacob, who owns Google shares. "But unfortunately, if investors' appetites for risk go down, it's going to affect all these companies."
