WHY AAPL, GOOG AND EBAY WILL SLASH AND BURN INVESTORS
This article also appears on Forbes
We are squarely in the middle of a point in history where the speed of innovation is causing entrepreneurs, innovators and investors to question everything they know about business. Never have we witnessed a point in time when companies that were thought to be bulletproof so quickly fall into the trash heap labeled: has been and wanna be. To be an established technology company in such an environment is an exercise in prescription drug dependence and paranoia. To be an up and coming technology entrepreneur during such a time is an exercise in opportunity and limitless possibility.
10 years ago investors thought companies like MSFT, CSCO and YHOO possessed the dominance and relative value necessary to blossom into investments that would put their kids through college, fund an expensive bathroom with an odd looking sink, or perhaps support an addiction that had become way too fun to give up. Instead these companies have been left behind by investors as technology has already turned them into dinosaurs.
Even worse than becoming a dinosaur is becoming a fossil embedded in solid rock, covered up by mounds of dirt. Companies like Palm, Nokia, Vonage, Sirius and RIMM are all flashes in the pan. Judging by that list, it would seem that the world of wireless is the fastest moving technology innovator. And why wouldn't it be? We use these devices nearly every single minute of every single day. They are the devices that have come the furthest in terms of innovation over the past 5 years. They are also the devices that will see the most changes and innovative add-ons in the next 5-10 years.
With all this said, here is a list of 3 companies that should keep you up at night if you are a long-term investor in any of the names. Their futures, while appearing solid, are anything but due to the whims of the modern day consumer, the speed of the technology cycle and the path that technology is currently taking:
- AAPL - Cult following. Everybody has at least one of their devices. There is nothing but a circle of love and praise being hailed upon the company. They recently made plans to build a circular spaceship type of office. Pretty cool. At the same time, it reminds me of other grandiose plans that have marked the top of not just companies, but entire civilizations of people.
The bottom line with AAPL is that it is a maker of gadgets. Gadgets will only get you so far before consumers and technology move onto other products and companies that are moving in even more unique directions.
The entire world of technology is focused on taking market share away from AAPL. The past decade of innovations, led by AAPL, have forced technology companies around the world to look as far down the road as possible to create the next Ipod, Iphone or Ipad. The best innovators and minds around are all targeting Steve Jobs and his seemingly invincible product line.
It's like having a dominant center, who manages to win you 3 NBA championship trophies in a row. You had better believe that teams will be working night and day to get bigger and develop ways to stop your big man before you win a fourth trophy.
You can't quantify a downfall. There are no ratios or numbers that will tell you where the consumer is going to move next. What you can count on, however, is that move on they will. There will come a point in AAPL's existence where the premium paid will not justify the potential for return on capital down the road. We may be at that point now or it may take another year to get there.
Just as nobody saw the fact that MSFT was in a poor position in 2000 and CSCO would be going nowhere over the next decade. Few will see the fact that AAPL has the potential to ruin those who put too much faith in an icon that could fall off just as quickly as it came up.
- GOOG - Internet advertising has been moving right alongside wireless in terms of speed of innovation and the fickle nature of the customer. While GOOG has been in a dominating position over the past several years, there are reasons to question whether this dominance will continue.
Ten years from now can anybody with a semblance of vision tell me that the pay-per-click model will the dominant force in internet advertising. Will Google even be in a position to have internet users click on their ads to create revenues? How will search evolve over the next decade? If there is one area of the internet that will evolve tremendously over the next 5-10 years, I would think it would be advertising first and search second. These issues create enormous uncertainty for GOOG's future revenue model.
Then there is the issue of the government challenging the army of lawyers that GOOG has assembled. There is nothing that slows innovation as quickly as dedicating your attention to taking on the US government. It handicaps a technology company into focusing time and resources to a project that produces zero results other than survival of the company in its current state. This couldn't come at a worse time for GOOG. Just as companies such as Facebook threaten to continue taking market share and may reinvent the way in which companies target consumers.
And there is, of course, the issue of GOOG attempting to diversify itself in every direction imaginable. While it is cool to watch what they come up with, it is difficult to think how all of these initiatives will add to bottom line. When we look back on GOOG in 2020, it may just be that lack of focus that is blamed for their poor performance.
- EBAY - Over the long-term I think that EBAY has the opportunity to be mediocre at best and obsolete at worst. The company has done little to diversify away from being an online auction site. Whereas a company like AMZN that used to be 100% consumer driven 10 years ago is now a leader in cloud computing and dominates the internet in more than one way. EBAY is still that place where you can buy baseball cards and sell old pairs of jeans.
Very simple here: The company has been steadily losing market share over the past few years. This is a trend that will be difficult to reverse as they aren't positioned well internationally. And domestically they don't have the innovation to differentiate themselves from the millions of different options consumers have for bargain shopping on the internet.
The answer for EBAY is simple: Spin-off their internet payment business. It dominates the marketplace and has no business being attached to their auction business. Allow the internet payment business to flourish. Focus on wireless initiatives within that business. By keeping their internet auction business and internet payment business together, it will only stifle growth and innovation in the one bright spot that the company seems to have.
Keep things as they are and the company will be wearing a capital "L" (for Loser) on its forehead for sometime to come.
Next week I'll be presenting 3 companies that should be a part of every investors portfolio, regardless of whether you are 12 years old or 82 years young.
