Momentum-Stock Doubters Get Walloped As Facebook and Apple Reignite

“Stick with momentum plays” appears to be one of the urgent alerts the market delivered yesterday (Apr. 23) as Apple AAPL +8.2% (AAPL), Facebook(FB) and Google GOOG -0.34% (GOOGL) clicked Refresh. 

Shares of these tech leaders reignited as Apple and Facebook surprised Wall Street with positive announcements and first quarter results that pleased investors, including some technology-sector doubters.

Apple’s stock boomed and climbed some 8%, to $564 a share after Apple CEO Tm Cook proclaimed that the maker of the ubiquitous iPhones and iPads will return to shareholders more than $130 billion by the end of next year, up from a previous goal of $100 million. That adds $90 billion to Apple’s total buyback program, way up from a previous $60 billion target.

And Facebook’s stock also bolted, rising nearly 4% to $62 a share, after the world’s largest social media company reported first-quarter results that showed profits tripled to $642 million  and revenue jumped to $2.5 billion from $1.46 billion a year. In 2012, the year Facebook went public, net income was a paltry $53 million, or 1 cent a share.   

Prior to yesterday’s rally, the rambunctious technology stocks had been taking it on the chin, with most investors spooked by the sudden reversal in technology hotshots Google, Facebook  — and Apple (AAPL), which continued to be on the ropes.

These firebrands spearheaded the market’s recent pullback prior to yesterday’s massive comeback, although the group’s big retreat shouldn’t have been a surprise. Many of these “momentum” tech stocks had been super-hot for more than a year, powerfully barreling higher to new all-time record levels. So some air had to be let out of those hefty gains.

But long-term investors – and the nimble among the opportunistic traders –who took advantage of the decline by snapping up the battered tech shares, notably Facebook and Apple, reaped a bonanza.

 Google, for instance, which did a two-for-one-split, had dropped to $534 a share from its 52-week high of $604.83, and Facebook was down to $59 from a year’s high of $72.59. And the long-beleaguered Apple had fallen to $524, off from its 52-week high of $575.14 – and way down from its all-time high of $705.07 reached in 2012.  In 2011, the stock had plunged to as low as $310.50 a share.

But swiftly, all that has changed. Google, Facebook and Apple pulled a surprising powerful turnaround that has prompted many investors, including some tech skeptics, to give the technology stocks a second look. Quite possibly, they are changing their negative outlook on so-called momentum stocks. To be sure, Google, Facebook and Apple have recaptured their standing as the tech leaders to watch – and own.

One of the most closely watched stocks is Google, the world’s largest Internet enterprise specializing in web search with a singular purpose of organizing global information to make it universally accessible and useful to everyone. So its decision to split its stock shouldn’t have been a surprise. The company did a two-for-one split in April 2014, creating Class C shares (GOOG)which have no voting rights.

Some tech investors were initially disappointed at Google’s first-quarter results which, they argued, weren’t as good as had been forecast by some analysts. The average paid clicks increased 26% and average cost-per-click dropped some 9%. But revenues impressed the bulls as it climbed 19%, to $15.4 billion, way up from $13 billion a year ago. First quarter earnings of $6.27 a share vs. $6 a year ago, however, were below some analysts’ expectations. 

 But S&P Capital IQ’s Scott Kessler was one of those who liked the first-quarter results, who had raised his recommendation on Google’s Class A shares (GOOGL) to a buy from hold on April 7 — way before the earnings report came out. Kessler expects the stock to drive up to $650 a share in 12 months. Kessler figures Google’s revenues will jump 11% in 2014 and by 15% in 2015. Google closed on Apr. 24 at $534.44.  

Robert S. Peck, analyst at SunTrust Robinson Humphrey, says Google continues to trade at an “attractive valuation to its growth profile vs. its large-cap peer group.” He notes that “given the still-steady growth of Google’s more mature core advertising markets and its leading competitive positioning in products like YouTube and mobile (which are in a much early growth stage), “we feel Google is attractively valued.”

Facebook, which has spent more than $20 billion to acquire  messaging upstart WhatApp and little-known virtual-reality enterprise Oculus VR, is surely another momentum play that tech and social media investors should own. As revenue rocketed 72%, “the percentage of daily users of Facebook continues to increase, much to our surprise and joy,” said CEO Mark Zuckerberg.

Laura Martin, analyst at investment firm Needham who rates Facebook a buy with a price target of $80 a share, notes that Facebook’s “captive audience is the installed base over which the company has optionality to generate revenue.” Facebook has monthly active users of 1.28 billion, with average revenue per user in the first quarter rising 33% to $2, according to the company.

Martin figures that “at 17 minutes spent per day, the longest online, Facebook’s upside potential is amplified by long time-frames available to reach its audience.” Facebook, she says, is a rare large-cap growth company that “deserves a premium multiple, given its $3.7 billion of daily trading volume, a $14.4 billion market cap, and revenue growth of 55% in 2013, and an estimated 41% in fiscal year 2014 despite its size.”

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