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Technology Round Up - June 5, 2012
There have been a number of noteworthy developments in the technology space recently. They will likely have a material impact on the companies in the sector and the markets they serve.
Facebook’s Stock Market Debut
Facebook (FB) recently completed its much-anticipated Initial Public Offering (IPO). The equity began trading on Friday, May 18th. The IPO was initially priced at $38. After an initial spurt, the stock finished its first trading session near the $38 mark. Investors were discouraged by the lackluster showing, considering how popular IPOs often increase significantly in price on the first day. It has been mostly downhill since then, with the stock falling from $38 to around $27 in its first couple of weeks of trading. We attribute this weakness to several important factors. This includes investor concerns about the business model and the stock’s rich valuation (both of which are discussed below). Weakness in the broader equity market hasn’t helped, either.
Facebook has posted dramatic growth in its user base since its inception in 2004. With over 900 million users, the company has become the premier social networking web site. This achievement is nothing short of remarkable. However, the company is not without risk. It operates in a competitive environment, which can change dramatically in just a few years. Some investors may be worried that Facebook could ultimately suffer the same fate as the rivals it previously surpassed. At the moment, investors are concerned that limited advertisements on its mobile site will restrain top-line growth. Mobile user growth may well continue to outpace ads going forward. This could hurt performance, as more people access the site from mobile phones (rather than from a desktop or laptop computer). Meanwhile, others are worried that growth might already be slowing at the social network. First-quarter revenue compared favorably with the prior-year period, but was down 6% on a sequential basis. Seasonal trends may be at work here, but it is worth noting that net income declined on a year-over-year basis.
In sum, the equity’s rich valuation depends on impressive growth in revenues and share earnings for the foreseeable future. These growth prospects may well be baked into the share price. The stock prices of such companies can decline significantly should unforeseen obstacles emerge or if prospects dim. Conservative accounts are probably better served elsewhere. Venturesome investors are advised to tread carefully here, as stocks without much trading history are difficult to value.
Samsung’s New Offering
Samsung Electronics introduced its Galaxy S3 smartphone in Europe and the Middle East last week. The smartphone runs Google’s (GOOG) Android operating system. Its 4.8-inch screen is one of the largest ever on a smartphone. The new phone even tracks a user’s eye movements to keep the screen from dimming or turning off when not in use. Samsung has introduced its own music service on the S3, in an effort to create a better experience for its users. It also features voice recognition, and image-recognition software.
Samsung has spent a considerable sum advertising the S3, and major global carriers have been aggressively promoting it, too. This has resulted in speculation that global sales may surpass the 20 million reached by the Galaxy S2. The recent introduction ought to allow the S3 to get a head start on Apple’s (AAPL) upcoming iPhone 5.
Yahoo’s Big Deal
Yahoo! (YHOO) has announced an agreement to sell up to half its 40% stake in Alibaba Group back to the China-based e-commerce leader. The deal will likely be valued at about $7.1 billion, comprised of at least $6.3 billion in cash and up to $800 million in newly issued Alibaba preferred stock. Moreover, the agreement establishes a framework through which Yahoo! can sell the remaining portion of its stake. In addition, both companies have agreed to amend their existing technology and intellectual property licensing agreement. Yahoo! would grant Alibaba a transitional license to continue operating Yahoo!China under the eponymous brand for up to four years. Alibaba would make royalty payments to Yahoo! during this time. The transaction, which is expected to be completed within the next six months, remains subject to customary closing conditions. The sale ought to greatly enhance Yahoo’s cash position. The company intends to return nearly all of the aftertax proceeds to shareholders following completion of the deal. The board of directors has increased the share repurchase authorization by $5 billion.
This follows news that Yahoo! chief executive Scott Thompson stepped down following allegations that he misrepresented his academic credentials. Ross Levinsohn, the company’s global media head, has taken over as interim CEO. Yahoo! remains in the midst of a significant transformation. Efforts to make itself smaller and more nimble ought to enhance profitability. Sustained improvement is by no means assured, however, and our view of the company’s future remains somewhat clouded.