Technology stocks are not for the faint of heart. Corporate earnings come in and out like tidal waves. The investor sentiment soars one minute and dives the next. I can give you a few lessons to help you navigate the potentially profitable or potentially devastating world of technology stocks by looking at the case of Research In Motion Limited (NASDAQ/RIMM) and the mobile phone market.
The number one sign in any industry, but technology stocks in particular, of a company that might have problems is when you see arrogance rise up and become palatable. Technology stocks are especially a concern, because the company that can take over as leader could be a couple of guys working in their basement and in a few short years rise up as the dominant player.
If we look back just a few short years ago, Palm had the “Treo” and this of course was at the same time as Research In Motion (RIM) was selling its “BlackBerry” phones. Palm eventually fell by the wayside, as investor sentiment for the smartphone market moved to RIM. Corporate earnings grew and the cult of the BlackBerry was formed.
This was before other technology stocks like Apple Inc. (NASDAQ/AAPL) and Google Inc. (NASDAQ/GOOG) were in the business at all. Looking back at some of the comments and it’s quite easy to see how so many firms underestimated the possibility of new technologies disrupting the business model. In 2007, Steve Ballmer, CEO of Microsoft Corporation (NASDAQ/MSFT), said that no one would pay $500.00 for a phone and no businessperson would want a phone without a keyboard. He believed that the keyboard would be essential in all phones. Considering the huge market share Google and Apple have in the market currently, it would seem that being that sure of yourself was a bad business decision.
Investor sentiment in technology stocks amongst various analysts during the last decade was completely certain that there is no way a computer firm like Apple and a software firm like Google could in any way compete in the mobile market. Most analysts in technology stocks believed at the time that the two giants in the industry would remain that way forever. The two technology stocks that were giants during the last decade were Motorola Inc., which Google bought, and Nokia Corporation (NYSE/NOK), which now trades at $5.00 a share.
RIM had a huge, dominant lead, but it sat back in its chair. Technology stocks that don’t consistently progress forward with new ideas will fall behind. Corporate earnings of technology stocks are affected profoundly by such game-changing developments and, unless they’re the ones doing the work, they will fall behind.
RIM’s latest quarterly results were quite bad. The biggest shocker is that revenue was down 19% from the previous quarter and down 25% from the same period in the previous year. Corporate earnings declined on such poor revenue. Corporate earnings showed a net loss for the quarter of $125 million compared to a net profit of $934 million in the previous year’s quarter. I discuss the problems for RIM back in January in the article, What Do Sears and RIM Have in Common?, and apparently they still aren’t on the right track.
The only reason the stock didn’t decline under $10.00 is that the CEO hinted that the firm is up for sale. This is when technology stocks get really beaten down, like Palm did. Potential buyers might just stand to the side and watch the slide continue for another year or two and pick up the pieces at just a few dollars per share. So far, there is no growth plan, no new sexy products, and nothing to drive corporate earnings going forward.
Technology stocks are either growing or shrinking their corporate earnings. They’re either developing new products or sitting back and assuming they will always remain at the top of the mountain. Investor sentiment will push the prices up or down in technology stocks based on what people think the future holds for the corporate earnings of the firms, but at this point RIM is a stock I would stay away from unless it blows me away with a great new product and a solid business plan.