There have been many noteworthy developments in the technology space recently. Some of these will likely have a material impact on the companies in the sector and the markets they serve.

Surging Share Prices

The stocks of several Internet companies have risen dramatically in the past year or so and, in some cases, appear to be very overvalued. The question is, which ones, if any, remain reasonably valued?

Shares of Netflix (NFLX) have advanced from the $50-range and briefly exceeded $350 in late October, before correcting somewhat (the stock now trades in the $320-range). The runup was driven by significant improvement in the company’s operating performance. Share earnings for the current year have rebounded strongly, following a dramatic bottom-line contraction for 2012. But we think the share price had gotten well ahead of the fundamentals of the business, and the stock was (and probably still is) considerably overvalued. With a price-to-earnings multiple well above 100, the valuation here appears very rich, in our view. The recent selloff could be part of a longer-term downtrend. At the very least, we expect a good deal of volatility in the near term. 

Shares of Amazon.com (AMZN) have more than doubled since the beginning of 2012. The company has reported strong top-line growth in recent years, but share net declined significantly in both 2011 and 2012. Last year’s earnings of $0.29 per share were particularly anemic. This has been the result of investment in physical and technological infrastructure. In particular, the company is funding Amazon Web Services, and increasing capacity to support its fulfillment operations. Clearly, these initiatives appear to be a wise move, prioritizing long-term success at the expense of near-term profitability. The investments should begin to pay off fairly soon, though, and we expect bottom-line improvement to commence this year or next. It seems likely that investors believe this, too, and have bid up the stock in expectation of dramatic share-net growth for the foreseeable future. This appears to be necessary to justify the equity’s current valuation. Even if the company were to earn $3.60 per share in 2014 (greater than our estimate and its previous record of $2.53 earned in 2010), the shares would still have a price-to-earnings multiple of about 100. Value-conscious investors beware.

Shares of Google (GOOG) have advanced from under $600 per share in the summer of 2012 to over $1000 per share at present. The company reported impressive revenue growth and a solid share-net advance for full-year 2012, and we expect this will be the case for the current year, as well. Google continues to benefit from steady increases in ad sales volume, driven by strength in paid clicks. Contributions associated with its Android platform should also boost performance. With a price-to-earnings multiple (trailing 12 months) in the high 20s, the company’s shares are trading at a premium to their historical average in recent years. The stock is by no means undervalued, but the valuation here is much more reasonable than that of our first two examples.

Yahoo! (YHOO) is another company that has seen its stock price rise considerably over the past year. The shares have increased from around $15 last September to over $30 today, in conjunction with healthy bottom-line improvement. Share earnings have benefited from lower operating expenses. Moreover, investors have been encouraged by the strong performance of the company’s investment in Alibaba. At the current quotation, the stock is trading at roughly 29 times trailing twelve months earnings. Much like Google shares, this equity is also trading at a premium to its historical average. While not very overvalued, it is definitely not cheap, either. As such, the company’s bottom-line improvement appears to be largely discounted by the runup in the share price. Though we expect efforts to improve operations will continue to bear fruit going forward, our view of the future here remains somewhat clouded.

Facebook Reports Impressive Third-Quarter Results

Facebook (FB) has recently reported its performance for the third quarter. Revenues advanced roughly 60%, to just over $2 billion. Share earnings of $0.17 were a considerable improvement from the loss of $0.02 a share registered in the prior-year period. Monthly active users increased 18%, on a year-over-year basis, to $1.19 billion. Mobile monthly active users of 874 million represented growth of around 45%. Mobile advertising revenue made up 49% of total ad revenue for the quarter, up from 41% in the June period.

However, the company has noticed a decline in daily use among younger teenagers. Investors have shown some concern that users from this important and fickle demographic may be flocking to newer sites. Readers ought to keep an eye on this issue. That said, given the enviable position that Facebook occupies in the social networking space, we wouldn’t be unduly alarmed at this time.

A New Smartphone from LG Electronics

LG Electronics, the South Korean manufacturer and marketer of consumer electronics, is introducing a curved smartphone to compete with devices offered by rival Samsung Electronics. Curved smartphones provide a more comfortable grip than regular flat-screen models. However, manufacturing costs remain fairly high, and curved models lack some of the features of their flat-screen counterparts. The curved phones are presently only offered in the South Korean market, as LG and Samsung are looking to measure market acceptance. Curved displays and flexible screens may well become much more popular in the high-end smartphone markets in the coming years.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.