DALLAS – Investors in a couple of marquee technology companies received a cruel mugging Thursday for what seemingly were small earnings mishaps.
eBay Inc., the world’s largest Internet marketplace, missed its fourth-quarter earnings target by a single penny, and yet its stock pumped red like a ruptured artery. The share price dropped almost 20 percent, and some analysts believe it could fall further today.
Shares of another technology bellwether, Qualcomm Inc., which makes chips that run mobile phones, were also clobbered by sellers. Its share price dropped 8 percent after an earnings warning.
These kinds of dramatic sell-offs should again serve as a reminder to investors that fast-growing, high-priced technology stocks are dangerous. James Weiss, a money manager at Weiss Capital Management in Boston, said it’s crucial that investors “understand the pond they are swimming in” when they buy shares in fast-growing companies.
By most measures, eBay actually reported strong results. Both its revenue and earnings were up 44 percent in the fourth quarter compared with the same period a year ago. The average growth rate of most big companies is below 10 percent.
Even its 2005 outlook was promising. eBay expects earnings growth of about 24 percent.
Most companies would celebrate this kind of growth rate. But companies like eBay and Qualcomm are in some ways victims of their own success.
First, fast-growing companies typically attract a different type of investor than slower-growing companies. Specifically, companies that are growing as fast as eBay attract momentum investors, and this explains much of the volatility.
Momentum players are not long-term investors like, say, investors in Ford Motor Co. or Alcoa Inc. And they are not particularly loyal to the stock. In the parlance of Wall Street, the stock is in “weak hands.”
“The second the momentum comes out of the stock, they are gone,” Weiss said. “That’s why you see such huge volume and volatility in these stocks.”
On Thursday, 86.5 million shares of eBay changed hands, compared with an average daily trading volume of 9.7 million. Similarly, 51.3 million shares of Qualcomm traded Thursday, about four times its average volume.
Second, eBay consistently beat analysts’ earnings forecasts. In fact, this was the first time in three years the company missed Wall Street’s consensus estimates.
“Investors were accustomed to the company consistently beating estimates,” said David Garrity, a stock analyst at Caris & Co. in New York. “There was a level of consistency built into the valuation of the stock. They didn’t expect to be surprised to the downside.”
Finally, eBay, which typically increases its forward profit estimates, lowered its 2005 net income forecast to a range of $1.48 to $1.52 – below the consensus of $1.60. The new forecast still reflects a 24 percent growth rate, but analysts previously were expecting a 43 percent rate.
Marc Pado, a market strategist at Cantor Fitzgerald in Los Angeles, said he believes the downward revisions in the 2005 outlooks were the biggest factors in both the eBay and Qualcomm sell-offs.
“eBay only missed slightly in the fourth quarter, but they came in well below expectations for the full year,” Pado said. “With these fast-growing companies, investors are only willing to pay when the growth remains high. As soon as a company tells them differently, they will head for the exits.”
Qualcomm said it will spend more on researching new products in 2005, and that will increase operating expenses by 25 percent. As these costs rise, the company said it will not match the gains of 2004, when profit more than doubled.
“Qualcomm came in below expectations,” Pado said. “If you buy shares in a company that says it will grow earnings 30 percent a year and then it tells you the growth will be 20 percent, your reason for owning the stock flies out of the window.”
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AP-NY-01-20-05 1858EST
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