Tech stocks followed the rest of the market northward last week, with the information technology sector posting a 3% uptick. While that gain across an entire sector is impressive, there were some really eye-popping gains in the technology world last week.
Let's take a look at tech's biggest winners across the past five days:
Weekly Price Change
Tudou (NAS: TUDO)
Guidewire Software (NYS: GWRE)
Perfect World (NAS: PWRD)
Source: S&P Capital IQ. Companies must be greater than $500 million in market cap and listed on U.S. exchanges.
A troubled merger?
Topping the list was Tudou, a Chinese video site that merged with rival Youku (NAS: YOKU) in a move that gave Tudou shares a ridiculous premium. That explains the company's huge pop this week.
Put me in the "you've got to be kidding me" column on the reaction to this merger. I've been bearish on Tudou's prospects since the company's IPO, even calling it a "dog" when I appeared on CNBC to discuss the company's IPO last August. The one hope I gave shareholders of the company -- that Tudou could be acquired -- seems to have come to partial fruition. But I'd argue that Tudou owners holding onto their shares of the newly formed "Youku Tudou" will soon see their post-merger gain evaporate.
The problem is simple: Neither company can effectively make any meaningful profit. They have broken models. Even the most bullish analysts praising the merger acknowledged this simple point. However, these bulls also contend that the combined unit will save on programming and video licensing costs, bandwidth, and marketing. Some of those savings will come to pass, but not to the extent that the bulls would argue, and it's pretty hard to find a path to where these savings justify the more than 10 times sales multiple on a company that will still have razor-thin margins, even if supposed "synergies" materialize.
The better China play?
Another Chinese tech company that saw huge gains this week was Perfect World. The gaming company managed to crush Wall Street expectations in spite of seeing its average number of active users decline during the quarter.
Each of the major Chinese gaming companies has its warts. NetEase licenses World of Warcraft, which is struggling in Asia. And Changyou is struggling to build out new games and gave poor guidance for the current quarter. Yet they're all trading at dirt-cheap multiples, which belies their continuing ability to drive the bottom line. Fellow Fool Rick Munarriz recently opined how cheap gaming stocks are within China, and that's an opinion I've long believed as well. Even if Perfect World isn't your perfect stock, there are plenty of options for investors across the space.
An IPO to believe in?
While lacking the "sex appeal" of other IPOs like Demandware, which get splashy "cloud-based IPO!" headlines, Guidewire has done pretty well for itself since going public earlier this year. The company issued its first earnings report as a publicly traded company on Tuesday and impressed investors with adjusted earnings of $7.8 million on $55 million in sales.
While those results are impressive and Guidewire seems to own a nice niche in the property and casualty software industry, the company's sky-high valuation relative to its growth expectations is a bit much for me. While there are plenty of question marks surrounding it, if I was making a play in the insurance software industry, I'd make a play for Ebix (NAS: EBIX) at 13 times earnings before buying Guidewire.
One more for the road
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At the time thisarticle was published Eric Bleeker owns no shares of any companies listed above, but those Chinese gaming stocks sure are interesting.Motley Fool newsletter serviceshave recommended buying shares of Ebix and NetEase.com. Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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