I worked in the technology sector all my life, however I would limit my investment in it. Currently outside my own business, I do not consider owning any investment in a hi-tech company. The rate of change is simply too vicious to suit my investment style of long-term value investing. Category killers are introduced in high-tech more than any other filed I know. Here are few observation on the sector:
- Single product companies like Google and Research in Motion are far more riskier than companies with a host of products like Microsoft or Apple. Google killed Yahoo and Yahoo killed Lycos and host of other search engines in a flash. Same thing with the BalckBerry maker, an introduction of a superior product can kill the company prospect in an instant. I would never invest in a Google or RIM, as their demise can come way more faster than any other company.
- Most hardware companies are a commodity business. Computers, servers and similar devices are pretty much a commodity business that lack any differentiation or any real competitive advantage.
- Software makers days are at a competitive disadvantage compared to software-as-a-service providers. The software model will be dead soon and software companies like Microsoft, Oracle and SAP will be go through a gut wrenching change to alter their model and their success probability at that will be very small. Software culture is vastly different than the service culture and established software companies will be losing to new smaller companies that are built around that model. Simply you can't just take your existing software and turn it into a service; it was not designed to be a service and companies who follow this strategy will fail.
- Companies that provide service as core of their product line like software-as-a-service will do better than software developers. In particular look for companies that are transactional rather than subscription based. More importantly companies that provide process oriented services are better positioned to capture more share than generic software.
- Hi-tech companies product differentiation has gotten far too complex to satisfy customers. When I try to decide on a chip for our environment I get lost in how Intel and AMD are marketing their chips. The good old days of 386, 486, Pentium are gone; now the same chip have endless configuration that I am not quite sure any more if I need all this information to make a decision. I will look for something simpler if I can find it.
- I like business process focused solutions rather than pure technology focused companies. In reality the end customer do not care about the latest innovation rather the best technology to run his business. I see companies that focus on business processes to be more successful.
Investing in technology companies can be rewarding, as early stage investors in Microsoft and Cisco and even Google found out. But I bet you for every Microsoft there is 10 maybe 30 other companies that did not make the grade and failed. Your odds of picking the next Microsoft are against you, simply there are so many factors that must be aligned for a high tech company to be successful like Microsoft. That's why I work in one where I can control the decision making process but I will seldom be an investor as it will be too hard to study all the factors that can produce a winner.