It's Time to Admit Ignorance in Tech Investments
Danny is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
My regular readers know that my brother's Facebook (NASDAQ: FB) IPO investments were the final straw that motivated my writing. He knows little of tech and nothing of software development. There's one important difference, however, that sets apart my brother from some investors I've encountered online: you see, my brother will admit when he is clueless.
Let's see what we can glean from the investors that know it all, starting with one of the most contentious investments of the year.
If Apple Has Low-Hanging Fruit, You Don't Know What It Is
The iPod was revolutionary. The iPhone kicked off the smartphone industry. The iPad made tablets something that people wanted to buy. You didn't see any of them coming.
There are great reasons Apple (NASDAQ: AAPL) could be a buy or a sell, but relying on some herd-inspired guarantee around "innovation" is an offensive lie to software developers and a lie to yourself. Apple intentionally operates as a black box. Unless it's from an NDA-violating Apple employee, the illusion of certain innovation deserves more doubt than trades.
It's time to admit we don't know if Apple TV will be a hit. It's time to admit that a former $700 price tag does not guarantee a good deal on the company today. It's time to treat money like it's worth something more concrete, and act on actual facts like the following:
- The latest earnings report was generally positive
- Chinese sales were strong last quarter
- Struggles are ongoing for smartphone market share
- $137 billion is sitting idly but pretty
- Though Apple operates as a black box, competition sometimes doesn't. We can gauge that, rule out possibilities or consider threats, and evaluate advantages
It's not as over-hyped, but it's still a business. Whether you're struck by the fad of predicting doom or you've been spurred toward ownership by trendy rumors of an inevitable rebound, it may behoove you to take that first step and admit what you don't know. Then, when you're ready to dig into real reasons to buy and sell, The Motley Fool's analysis on Apple will be waiting. Their senior technology analyst and managing bureau chief, Eric Bleeker, has outlined its strengths and weaknesses along with clear criteria for informed judgment.
Not Playing With Video Games Anymore?
Don't you know? Games are dead. Everyone knows that. My hindsight is 20/20, so even if I didn't know what I was talking about, I certainly would have past numbers to let me keep talking.
My favorite pieces of evidence to that point have been a summary of Q4 and a screen-captured chart showing the abysmal performance of video games since 2008 (courtesy of an investor convincing me that games are a terrible investment).
The best thing? He's right. Stock prices have fallen for big game companies, and there's a clear past to show that. However, I'm a fan of investing legend Phillip Fisher, and my software development background -- in games -- gives me insight into what he'd agree is the most important factor in tech investments: internal operations. For the other 85% to my Warren Buffett, I recommend seeking valuations and other calculations at Jason Hall's blog.
In video game development, internal operations mean production methodologies, product management, gamer community management, game design balance, and much more. This is why companies like Nintendo and Sony are having a tough time adjusting to the new landscape of games: huge companies are inherently more difficult to re-organize.
However, Activision Blizzard (NASDAQ: ATVI) proved they could do it throughout 2012 with consistently positive earnings reports. I told you then what you hear in the earnings report now. This is a company with a formula for success that had solid plans on which it executed in a familiar manner. You don't need to know the intricacies of game development like I do to see this is a consistently profitable company.
In fact, what we don't know about this tech investment has nothing to do with its business: it's other investors. I had to face facts before appreciating this undervalued company. Other investors are simply terrified of this otherwise decent $14.80 billion industry.
Lose Money With Friends!
Any idea how their businesses will actually make money?
These two stories of IPO tragedies have shown strong numbers of users, but have yet to deliver on a profitable innovation. While Facebook is figuring out new ways to present ads to users, and Zynga tries to funnel theirs into an already-saturated gambling space, nothing has fundamentally changed for these businesses.
Like their user count, the cash behind these companies is huge -- large enough to fund many attempts before total failure. Facebook's recent fiasco around Instagram's user agreements frustrated Instagram enough that its user count is down 42% from its usual figures. But this is great news for investors: Zuckerberg is serious about making money. Zynga's recent earnings report wasn't spectacular, yet investors are riding high on speculation about the U.S. taking steps forward with online gambling.
So do we know how these companies will make money, yet?
No. Zynga can't keep dramatically cutting its costs and Facebook's graph search has strong competition against a Google+ network that is making solid headway toward Facebook's numbers.
Knowing A Good Tech Investment
Raising Google+ to become the #2 social network is but one of many advances Google (NASDAQ: GOOG) has made as a strong, well-recognized, and well-understood tech business. Though investors may see the high stock price as the mark of a missed opportunity, one software engineer outlines how Google's development patterns mark the beginning of long-term gains. Click here to find out how a new mentality in software production sends Google soaring into a future of self-driving cars, augmented reality glasses, and more.
Oh, you really can’t live without the hysteria? Fine, Google’s got you covered there too. Speculations about Google matching Apple stores can be just as fun as iWatch rumors, yes? Admittedly, Zynga’s recent hike is much more exciting than Google’s dull climb to just another all-time high.
When the hype turns into fatigue, we invite you to the ol’ bored and informed side. It's a different sort of enjoyment, but you might get into it in the same way you have fun with your other, non-tech investments.
dfavela owns shares of Activision Blizzard and Google. The Motley Fool recommends Activision Blizzard, Apple, Facebook, and Google. The Motley Fool owns shares of Activision Blizzard, Apple, Facebook, and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!