One hot product can drive the success or failure of consumer-oriented technology companies …and the stocks.
Individual investors may have an advantage over Wall Street professionals, who can be out of touch with trends and price points that can excite or put off consumers. Experts often rely on sales and profit growth, market share, and stuff that has already happened — even the stock price movement itself — hoping to divine future growth from such backward looking information. Actual consumers may be able to determine success or failure before all the numbers are in.
When was the last time you simply had to have the latest Nokia phone? Probably somewhere around six or seven years ago. Perhaps the slider phone in “The Matrix” — the original “The Matrix”. This is the core reason why Nokia stock (NOK) is one of the few big name 90s stocks that hasn’t recovered from the 2002 bear market low.
For comparison, I’ve bought four iPods in the last two years; iPods become obsolete faster than fins on an old Cadillac. And I was late to the iPod party.
Apple Computer (excuse me, it’s now Apple Inc., computers are so 90s) introduced the iPod in 2001. My friends started whipping them out shortly thereafter, playing DJ Middle Management at parties, and spinning (literally, because of the ATA drives) the cool (digital) tracks into the night … but just until 10pm, because they had to get up for a power point presentation in the morning.
Too bad we didn’t all buy the stock. We certainly had plenty of time. Apple stock (AAPL) didn’t take off until the spring of 2003, then climbed fairly steadily to today, now up well over 1,000% in less than four years.
Apple stock weakened with tech stocks in general early last year, but has since near double again to new highs. Apparently, investors are now more optimistic about the yet unreleased $500 iPhone, than an entire lineup of existing and future phones from still giant Nokia. Apple (AAPL) stock has added about half of Nokia’s market cap in the last few months (while NOK has gone nowhere). For the record, Nokia still earns about double what Apple takes in, but that’s old news. The iPhone is the future.
The funny thing is, Apple stock already went through a boom and bust cycle over the personal computer. The stock ran up almost as fast and furious in the two years before the 1987 stock market crash. Then Apple lost the PC war with Microsoft and Intel, and became one of the few big tech stocks to completely miss out on the 1990s tech stock boom. Other than graphic arts professionals, the Mac was a dying platform and the company was destined for bankruptcy, even though (as Apple nuts will remind you) they made “better” machines. The iPod saved the day.
If you’re dying to run out and buy a $500 phone that runs on the slow Cingular “dull” Edge data network, maybe Apple won’t disappoint this year. But maybe its time to move on and find the next hot product.
Here is a short rundown of my favorite tech companies and their hot products, and whether their stocks could be as successful as the gadgets:
The core product here remains a search engine with context sensitive ads. The most amazing thing about one of the hottest tech stocks of all time, is that this product really was just an improvement over existing technologies and search engines — for all the Google genius hoopla, they really didn’t pioneer much ground.
The whole thing smacks of GoTo, a paid search engine I used to advertise on back in the bubble years. But then, MySpace and YouTube are not far off from late 90s companies like Tripod, theGlobe.com, and GeoCities. Of course, Sony and many others already had MP3 players before iPod. This could mean that investors will do better investing in companies that improve on existing technologies rather than pioneer new products.
Today I use at least a half dozen Google non-internet search products daily (desktop search, maps, gmail, talk) and more products a bit less frequently. I’m even using Google on my phone. As for the stock, Google has little upside. Few of the new products have massive potential and non-advertising revenue growth doesn’t seem capable of supporting one of the largest market caps in the world. There has even been some misses with recent product launches, notably video, where Google got out goggled by YouTube.
Maybe I’m still just bitter from bidding too low in the Google IPO.
The biggest danger for investors in consumer electronics is this business is always gravitating towards being a commodity. Even a great market leader (like Sony with the Walkman) gets dragged down into a low margin game of indistinguishable products that consumers differentiate mainly by price.
Logitech makes computer and other tech accessories. Keyboards, mice, speakers, etc. Talk about a commodity business. Besides the fact that you can buy versions of all of these items for $9.99, often they are provided “free” with new computes. How do you compete with free?
Yet Logitech realized just because ugly, “The Office”-grade beige corded keyboards are near free, doesn’t mean people won’t pay more for some style and old-fashioned consumer one-upmanship.
The American consumer is flush and has been in a cycle of luxury and hip upgrading for years now. Why stop at handbags and hotels? Logitech is the W Hotels of keyboards. They are one of the new boutique tech companies — where design is more important than functionality, a move that is largely behind Apples newfound success, even though Apple had been delivering style before consumers demanded it. A similar company that didn’t catch this wave is Creative Technology (CREAF).
Products driving Logitech to ever-higher earnings (On January 18 they released their best earnings ever) include their sleek cordless diNovo keyboard line, recently improved to even slicker must-have status. If you see a cool thin black keyboard in a movie or a TV show, chances are it’s a Logitech diNovo. Other new products like the top-of the line Harmony TV remote controls, MX Revolution mice, and Z-10 speakers will help the stock.
I recommended LOGI on Cashin’ In a few weeks ago.
Flat panel TVs are fast becoming a commodity like DVD players. My first DVD player cost north of $1,000. Now they are practically stocking stuffers.
While Sony has been criticized for missing the boat on so many important consumer gadgets, notably MP3 players, they are having success in several areas. One way to define success is being able to sell a product at a large price premium to very similar products. Sony has achieved this in desktop computers, laptops, and LCD TVs.
My laptop is no better than a Dell (a company stuck in the 1990s that has largely missed this bold new era in consumer buying behavior) yet was $500 more than a comparable model. Call me a fool, but it looks cool. C’mon — it has stainless steel! Who cares if the batteries blow up once in awhile … you’ve heard of curb appeal? This PC has Starbucks appeal.
Sony LCD TVs - about the most expensive on the market for screen size — have removable color side panels to match your slick modern interior. What’s that got to do with picture quality?
Sony’s new PlayStation may not be getting all the buzz of the Nintendo Wii (another great company) but this premium priced product could help Sony get a Blu-ray DVD in enough homes to make it the HD standard. They don’t want a repeat of Betamax.
As for the stock, while I recommended SNE on Cashin In a few months ago, it doesn’t have that much more upside — perhaps another 20%. See how many Sony products you purchased (or lust after) over the next year to determine if it can go much higher.
What was once a low-rent brand in America is now almost as respected a brand as Sony. The company makes leading, expensive products in so many areas, but I’m attracted to their newly released computer monitors like the 931BW.
I’m not sure what MagicSpeed™ technology is, but I know this monitor doesn’t look out of place in your living room. For all the hoopla about computers and TV merging, few computer monitor companies make monitors that can stand up to an environment that doesn’t include a Swingline stapler and an inbox.
Samsung stock is difficult to buy for Americans compared to other foreign companies like Sony and Nokia. Your best be may be iShares S.Korea Index (EWY), a slightly expensive ETF with a huge stake in Samsung do to the companies massive size compared to other S. Korean stocks. Samsung is in just about every mutual und that invests in the region as well.
Do we really need a $1,600 washing machine that steams? We do if it’s available in shiny blue with chrome accents! Somewhere between my 1961 Cadillac and today, America’s large manufacturing companies forgot how to get consumers jacked up over ridiculous must-have features.
Like Samsung, LG stock is tough to buy, without buying abroad. Consider mutual funds that own it.
Wireless routers are a commodity and Netgear (NTGR) hasn’t been able to command a big premium over competitors. Yet Netgear’s iPodesque white UFO router is the clear choice over competitor’s TV rabbit ear-looking routers.
Netgear’s latest product, the soon-to-be-released Netgear Digital Entertainer, has potential to be a big seller, if Apple’s similar Apple TV product doesn’t lap up the market. The gadget allows you to watch all the questionable content on your computer (including YouTube videos) parked in front of the glow from your giant TV — with a remote no less. Apple TV, shipping in February, looks better, but seems to be more iTunes-centric.
Netgear’s Dual Mode Cordless Phone with Skype was just released, but has yet to be a sales barnburner. Still, this Wi-Fi phone could prove to be the missing technology that gets more Americans to use eBay’s recently purchased Skype internet calling service.
While I prefer NTGR stock around $20, like it was when I recommended it on Cashin In this past October, the current $28 range may be good for another $10 or more, an upside if these new products take off. Unlike so many other tech companies, this one is still pretty small at under a billion in market cap.
Everybody wrote Microsoft (MSFT) off after years of lackluster performance. They had nowhere to go but sideways (or down) after hitting such a high market value in the tech boom.
Until recently, the main drag was investor fears that the internet based software model, popularized by Google, and was going to slowly destroy Microsoft’s desktop software monopoly. Google now offers free spreadsheet and word processing software. Who needs Microsoft Office?
Apple Macs are cooler than Microsoft based PCs, so once you go all internet all the time, goodbye Windows. And the Zune digital music player? That gadget would have to offer free movies and songs to get people to give up the hundreds of dollars they have spent on proprietary format Apple iTunes songs.
What actually happened was Microsoft did what Microsoft does best - copy and populate. In Excel, I still can’t use more than 255 rows or my charts still look like Atari 2600 graphics. This lack of innovation is because Microsoft destroyed the other spreadsheet companies long ago — their only reason to improve was to get people to want to upgrade from their own product, a much lower bar than a threat from a strong competitor. Internet explorer hasn’t really changed in about six years — since Microsoft crushed the browser competitors. Windows still uses a retro 80s DOS system behind the scenes.
With these new threats we’re finally seeing real improvement out of my generations Standard Oil. The new Internet Explorer (automatically updating to a computer near you) is a massive improvement — zooming, tab browsing. Of course, it’s really just a knock off of Firefox. I’m dying to buy the new Office. The last “upgrade” led to buyers’ remorse before I even ripped off the shrink-wrap.
Then, their Xbox — a success story of winning business from industry leaders. Microsoft is also close to taking over the cell phone operating system world, assuming iPhones are not huge successes and more and more phones go to Microsoft Mobile.
I last recommended MSFT in September on Cashin In, but it still has another 20% or so to go as in sinks in to investors that these new products have a place in the future. Maybe someday the internet will really shrink Microsoft, but like we’ve already seen with the internet, innovations sometimes take many more years to fully play out.
Unfortunately (or maybe fortunately if you’re worried about downside risk as well as upside potential) most publicly traded tech companies have many products (particularly Japanese and S. Korean companies) that water down the benefit of any one product may have in driving the stock up 1,000%. Many interesting new sink or swim new technologies are backed by venture capital and are not public yet. These companies will either fail completely or deliver 1,000% or more returns to early investors (most often, the former, though you only need a few 1,000%+ returns to make a portfolio of dozens of total stinkers work out. That’s the math of venture capital anyway.
Some of the more interesting non-public (for now) stuff out there includes a way to charge your phone or iPod wirelessly (no more bags of tangled AC power cords when you travel). Auto GPS devices with live traffic data other internet based two-way information.
Investing in consumer tech companies is risky but consumers have more knowledge here than with say, biotech stocks. However, unlike investors, American consumers always win.
One danger with higher end, design-oriented consumer products makers is one bad recession could kill sales of products with such cheap competitors. People who lose their job or see their house value fall 40% aren’t going to line up to by $500 TV remote controls and cell phones.
Jonas Max Ferris is a regular contributor on "Cashin' In" and is co-founder of MAXfunds.com.
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