Earlier this month, Ford announced the update to its iconic Mustang....and, it is a sexy car. Driving down the open road in a convertible sounds like a fun way to spend a summer day. However, if you are an investor of Ford (which I am not), you are probably more excited about the F-150 launch. Why? Ford makes the majority of its profits from the truck line....those same trucks used by carpenters, gardeners and oil workers. While some may argue that the truck is sexy, there is no doubt that what it adds to the bottom line is as sexy as Kate Upton in a bikini to Ford's shareholders.
The same holds true to technology. The latest sexy stock may have all of the momentum, but few of them ever end up being great long-term holdings for investors. In an updated version of Benjamin Graham's classic book, "The Intelligent Investor", Jason Zweig points out the share price trajectory of two stocks that have a similar name (Cisco and Sysco), but could not be in more different industries. Cisco, in the early days of the Internet boom, was as sexy as it could get....I mean, an investment in Cisco was an investment in the Internet (at least, according to CEO John Chambers), and what was sexier than the growth of the Internet 15 years ago? Compare that to Sysco...I mean, aren't they the ones supplying that tasty food at your kid's cafeteria?
Well, I think you know where this is going....after the Technology bubble burst, Cisco share holds lost 3/4 of its value from 2000-2002, while the boring Sysco gained 56% in the same time period.
A lot, actually. Right now, there are some really hot/sexy parts to the space. Just look at wearable technology – it is everywhere. Big companies like Google, Apple and Microsoft have joined into the fray, all hoping to get you to use their respective platforms as the portal to improving your health (and, to sell more things to you along the way). The same goes for the smart home and the smart car....it seems the only thing getting more headlines than it are if pictures of Kim Kardashian's bare bottom.
So, does that make investments in this space bad....are they going to be like an investment in Cisco was in 2000? For some, it will for sure. Many companies in this space are getting lofty margins on takeovers, high enough that at some point, some executive will have to explain their actions to the board. I predict here that few of these companies have true long term staying potential and most of them, if they survive and are not acquired, will go the way of Red Hat.....a company that once had a share price of $140 and now after years of recovery, is trading at $60.
It is the companies that truly serve a market need that will have the longest life (with the most profitable growth). Like Sysco, where there is a need to deliver food to people, there will always be a need to monitor a septic tank, a boiler system, a gas storage tank, etc. These solutions would definitely not qualify as being sexy, but they are necessary and are often filled with fewer large competitors than the latest device to monitor your blood pressure.
The reality, like the Internet bubble of the late 90's, is that there is some room to grow for all IoT / M2M companies in all spaces for now....the market is so new and there is so much pent up demand. Over time, the companies that offered true value will be the ones that will be the most friendly to investors....it just may not be as fun to talk about how your company monitors solid waste at your next cocktail party!