Leave These Stocks Out of Your Cyber Monday Cart
These stocks are far from bargains.
Stock Strategist
It's the Monday after Thanksgiving, which means that plenty of cubicle dwellers are headed online to snap up some deals and get a jump on their Christmas shopping. It's a testament to how important Internet shopping has become that over the last few years, "Cyber Monday" has become as ubiquitous of a retail term as Black Friday or Door Buster sales.
The fact that online shopping has become a huge market shouldn't be a huge surprise to investors. Anyone who was around during the tech bubble days remembers promises that consumers were chomping at the bit to buy everything from ice cream to dog food to new cars online. Although it has taken more than a decade for that hype to partially materialize, on many levels those promises have come true.
Unfortunately, partially fulfilled hype is cold comfort to investors who were wiped out after investing at the peak of the tech bubble. The Internet did turn out to be profoundly transformational, but because valuation levels were so absurd, investors didn't make any money. The lesson to be learned here is clear you shouldn't buy the hype at any price.
Yet even after the tech bubble, the market can't seem to get over its infatuation with exciting new online business models. Take software as a service for example. This industry has been widely hailed as the future of computing. Instead of having individuals run programs on their own machines, third-parties handle all of the heavy-duty computing and users just access the application from a web browser.
This model certainly has a lot going for it. The maintenance and upgrade functions get passed off to an expert and oftentimes costs can be kept extremely low. Even with obstacles like greater downtime and data security worries, software as a service will almost certainly gain market share from conventional software.
Given this rosy industry outlook, investors have piled into software as a service stocks without regard to the actual growth prospects of the firm. Salesforce.com (CRM) has a bright future but our analysts are deeply skeptical that it will ever reach the revenue and margin targets implied by its current stock price. We think the shares are trading for more than twice intrinsic value.
So even in the face of bright prospects, investors are better off crossing Salesforce.com off of their Cyber Monday shopping list. To find other stocks best left on the virtual shelves we used Morningstar's Premium stock screener to look for Consumer services and software firms that had one or two star ratings. You can run the screen for yourself here. Below are three firms that passed our screen:
Amazon.com (AMZN)
From the Premium Analyst Report:
Amazon's low-cost operations, burgeoning network effect, and customer loyalty give the company sustainable competitive advantages. With these and its asset-light business model, Amazon generates high returns on capital, supporting our opinion that it has a wide economic moat.
Although Amazon's business model looks incredibly scalable, margins haven't improved as much as many have expected. Operating margins peaked at 6.4% in 2004 and haven't topped 5% since 2005. We expect operating margins of 4.8% in 2014 compared with 4.6% in 2009. Despite low margins, Amazon's asset-light business model and high inventory turnover allow the company to generate high returns on invested capital, which we estimate have averaged about 50% in the past three years. We expect returns on capital to remain robust.
Citrix
From the Premium Analyst Report:
For a long time, IT personnel have used Citrix Systems' application virtualization technology to run regular software applications on central servers and provide employees access to those applications over a computer network. For example, rather than maintain a copy of Microsoft's (MSFT) Excel program on every employee's desktop computer, an organization might use Citrix's software to run Excel on centralized servers and allow employees to gain access to the program as needed over the company's network. Citrix has dominated the market for virtualizing software applications on Microsoft's Windows platform, but the rapid pace of evolution in the scope and nature of virtualization technologies has altered the competitive landscape. The company lacks an economic moat in the new playing field, in our opinion.
Solera
From the Premium Analyst Report:
Solera benefits from a solid market position in a niche segment of the software industry. Although growth can be limited by the maturity of the auto insurance industry in the company's core markets, Solera's expansion into new geographies and product offerings, combined with the company's scale advantages and ability to exploit labor arbitrage, should improve profitability in the near term.
Solera faces the possibility that a large customer will decide to implement its own in-house software and database solutions and stop using the company's solutions. In addition, regulatory changes controlling the use of auto insurance claims processing software could affect the way or degree to which insurance companies use Solera's products.