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Why Investors Suck at Tech
February 2007
DISCLAIMER: Do your own research. I make no claims as to the accuracy of this information.
There's something about the technology that causes investors to suffer
massive brain anneurisms when placing trades. I've watched (and occasionally
cashed in) as mindless fools throw their money aimlessly into the wind rather
than take the time to understand and invest in good technology. It begins
with hysteria, and most tech investors have it in spades. This rises from the
effectiveness of a company's marketing department to engender initial
hype that investors believe will translate into consumer enthusiasm.
The good products succeed, but the rest typically dwindle within the first few
weeks of hitting the market.
As a recent example, take the Playstation 3. It was largely anticipated and given the illusion
of limited supply. This led to massive hysteria, robberies at Best Buy stores, and eBay
auctions selling consoles for two or three times the price. Within a few weeks,
people began realizing that the units were poorly executed into the market (or
in terms of the consumers' demographic, "sucked"). Today, stores have got dozens
of units lying around on the floor, and unfortunate owners offering to take the
$400 hit to trade for a Nintendo Wii. You can't even get people to steal
them anymore! Nintendo didn't put nearly as much into a large-scale
effort. While Sony was scooping up all the PowerPC processors they could
find (one of the driving forces behind Apple's switch to Intel), Nintendo got
a couple of Japanese guys to drive their smartcar to a redneck's house and
teach him to go virtual fishing. Nintendo knew their product was unique,
inexpensive, and technically perfect for the market, and so the market responded positively. Wii outsold PS3 by 3-to-1 in January.
The only thing separating the two from an investment standpoint is a sense of
technology. With the success of the PSP, the PS3 faired a very good chance of
hitting it big, with big profits a year or two from now. The problem plaguing
most tech investors is that they lack what most of us working directly in
tech have: a radar for good technology.
This lack-of-understanding in tech is what hit investors last week in other market sectors.
Secure Computing Corp (NASD:SCUR) posted stellar earnings last Thursday,
which was really no surprise to anyone who understands technology.
It was obvious to see that the Secure Computing / CipherTrust marriage was one
of the more powerful mergers in 2006, providing firewalls with the global
intelligence to fend off attacks based on network reputation. This means that
the box can tell if the suspect connection is coming from a zombie as part of a distributed attack, sending spam, or if it's had a pattern of good behavior on the network and can be trusted. Unlike
self-defending networks, which require adaptation (and thus time) to be
optimally effective, networks protected by TrustedSource can block attacks
before they ever reach the company's network. It provided Secure Computing's
suite of products with an intelligence never before seen in network security - eat your heart out
Cisco.
And Cisco did. A few months later, they quickly snatched up CipherTrust's competitor (if you could call them that),
IronPort, paying three times as much for a company whose technology is, if
anything, a decade out of style. IronPort's idea of
protecting users from malware seems to involve sitting on mail until it becomes potentially too old to be useful to the recipient. This, combined with their Bonded Sender
solution (a horse that has been dying since it was first concocted) leaves
the only intelligent question "why in the world did Cisco pay for that?" I
think the answer goes back to hype, and not technology.
So out of these choices, which hard-working company did the top investment dogs put their money in? Neither. Jim
Cramer decided to put his cash into Symantec Corporation back in October,
saying:
"I think Symantec (NASD:SYMC) is best of class, and that's what I want to buy, not
SCUR."
And thus Cramer and his lemmings blew their wad on stock that would shortly
thereafter tank. Symantec's products were so unsuccessful, in fact, that they
decided to exit the security appliance business all together four months
before Cramer labeled them "best of class". That puts Symantec out of
the market scope of either company (shhh don't tell Cramer). And as far as desktop
antivirus, many are seeing Microsoft poised to take that part
of the market over - issuing a death sentence for companies like Symantec and
Mcafee.
I'm sure Cramer made his money back somewhere else, but watching this has
convinced me that even great investors don't know jack about
some of the technology they're buying.
Not everyone made poor decisions this year with respect to network security. One investor by the name of Tim Beyers had been touting
Secure Computing for months prior to February's earnings report. In fact,
he was the only one who could see the great potential in Secure Computing,
and eventually got a little poetic justice. Unlike many investors, he understood (and often wrote about) the technology behind the company, yet none
appear to have been listening, missing out on a 30% overnight gain in share
price. Congratulations, Tim.
But of course, having good technology isn't all that matters - it's having the
best technology, and in fact the challenge is to find the one company in
a given market space that has it. This is why it's so critical to understand
tech before investing. Coming in second just doesn't float in technology. Case in point: have a look at
SanDisk Corporation (NASD:SNDK). SanDisk announced several new devices at the
consumer electronics show which, initially, bolstered their stock. Among
these were USB TV, a portable widescreen video player, and the world's
first WiFi-enabled music player.
At least, for the next 24 hours it would be.
Apple's Macworld conference trumped every single one of them with their own
product announcements - and they did it better than SanDisk did - by far. Not only were the products better, but the presentation made SanDisk look like a
group of amatures. Any hope of USB TV's success
took a nosedive when Apple announced Apple TV. This
quite simply blew the socks off of SanDisk's design, which was a cradle looking
monstrosity you had to detach from and swap between your laptop. Apple's
elegant execution of this bright idea, on the other hand, included a sexy
looking box that connects using HDMI cable to any High Definition TV, and
touted WiFi connectivity (neither of which USB TV supported). What's more, Apple ingeniously took command
of an already captive audience by giving it full compatibility with iTunes.
To put the final nail in the coffin, Apple delivered it within 30 days, while SanDisk's product release is still a shaky wait until summer (or beyond) - if ever now.
Apple also took the coutesy of putting SanDisk's plans for a widescreen movie display and
wireless music player to bed with the introduction of their iPhone,
which does both.
SanDisk had some great ideas, but didn't have the technology to execute them
well at all, and as a result is likely to wind up being the number two
manufacturer of such devices. Number two might not sound bad, but consider
the difference in revenue between the #1 digital music player manufacturer (Apple) and
anyone else. To further insult investors' intelligence, the massive cost
involved in such R&D ate at SanDisk's profits, leaving their stock trading down as low as $38 from a previous $44.
I initially thought SanDisk had the potential to become the next Apple, and
Jim Hale wrote an article agreeing with my sentiments a few weeks later. The difference is that those of
us who were in tech could easily see SanDisk's failure to capture the market the minute
the products were announced, and was especially apparent after Apple's answer.
In all fairness, SanDisk did announce a solid-state hard disk, and all that
Seagate (NYSE:STX) could offer in response was an effort to make storage
"cool". Perhaps this will save the struggling manufacturer and convince them
to stick with what they know.
And that's what investing in tech comes down to - stick with what you know.
There's no benefit to be gained in listening to the bulls when it comes to
tech, because the bulls don't seem to know what they're doing (other than
manipulating the market). If you want to make millions in tech, find companies
with technology that you can not only identify with, but identify as "good
technology". What is good technology? Good technology is original and
innovative. Seeing good technology is more than seeing a product that could be
good, but finding out who would make something similar, and do a better job.
Technology is also about innovation in the market. Nintendo found a way to
get grandma interested in video games. That's pretty innovative, and it
didn't take mongering high-performance chipsets to do it.
Nearly all of the great technologies you'll find today are innovating and
adapting to new markets. Just have a look at DIVX (NASD:DIVX). What started
out as a means for piracy wound up selling as a product to people who
don't even need to know what DivX is, nor pirate movies to use it - just
look at all of the digital video recorders, cameras, and cellphones that
are now supporting it for recording content (Hint: type DIVX into Froogle). Their technology is so versatile, in fact, that
some speculate they're an acquisition target for Cisco and their new
video-based technologies. On the downside, their revenue has been flat and
unimpressive over the past six months, and will likely continue into the middle
of 2007, os it's a largely speculative stock. If they can capture the market,
however, they'll be another great innovator.
Making money in tech is a simple lesson: learn about the market space
you're in, and become intimate with technology before you even consider
throwing a dime into it. If you are going to listen to an analyst about the
product, make sure they not only have a firm grasp of their position, but the
underlying technial details (on a low level) that back it up. Be sure to follow sound investment advice, and
not the "fools of tech". Otherwise, you may end up becoming one.
Disclosure: Author has a position in SCUR
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