Make or Break Time for these Big Techs

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Many investors have their own concerns as to what will make or break a company, and I feel it's important to consider other opinions when making investing decisions.  As I've shared a decent amount of my own, I thought I would be appropriate to answer concerns that readers have had, hopefully adding new perspective to your investing decisions as well as my own as I mull them over.

Netflix-

In the following column, I argued that Netflix's (NASDAQ: NFLX) fate rested in its proprietary content that it was developing, modeling Time Warner's (NYSE: TWX) HBO.

One reader wrote: "No mention of the international expansion. Odd. I would have said the international expansion was where they are hanging their hat, and the self developed content more of an experiment.”

Absolutely, Netflix is investing a tremendous amount in its international expansion, forgoing profits in the near term to grow their business (standard business procedure for growth companies.) However, CEO Reed Hastings has made it public that he wants to imitate the HBO model and has invested hundreds of millions of dollars (100 alone for the upcoming Kevin Spacey series "House of Cards"). To think of such giant bets for a company with a market capitalization as low Netflix as an experiment is simply faulty logic.

What’s most important for Netflix is the retention of customers. Amazon (NASDAQ: AMZN) has been adding video content for its Amazon Prime customers on a continual basis, no doubt hoping to eat Netflix’s lunch, and broaden its consumer base buying products from its online store. Considering that Prime membership is slightly cheaper per year than a Netflix account and also includes free two day shipping on product purchases via Amazon. If Amazon’s video buffet ever offered the same selection as Netflix (or even close) um …. Netflix would have like zero customers.

Being a bright guy and recognizing this, Hastings has attempted to differentiate Netflix from the competition. Lillyhammer, the first Netflix original series (8 episodes) is surprisingly good, and added enough value to me and several friends, that despite our Prime membership, we concluded collectively that we would well be served to keep our Netflix account alive as well.

Expand all you want internationally, sign up millions of new subscribers; that’s definitely part of the business plan, but if the competition offers a better deal on a commoditized product, you’ll lose those untold millions you invested in expansion. 

Apple

The most profitable company in the world. Agreed. Good? How did they get there. Busting out amazing new and novel products with elegantly simple designs. The iPod, iPhone, iPad, even iTunes, all WAY ahead of the game. Who was at the helm? Steve Jobs- sadly, no longer with us.

Many Apple bulls have discounted my thoughts that without Jobs, Apple (NASDAQ: AAPL) might lose that spark that kept it so far head of the curve. For sure, Jobs tried to build a company that would outlast him and no one except for Apple insiders know the new products they have coming out, but one thing is for certain-- competition is catching up to their current crop. The iPad Mini has been panned in various reviews as both coming late, and falling short of the competition while being priced higher.

Here’s the key that I want to stress. Stocks are a risk/reward. Apple, with a P/E of 14 is not overpriced, especially with 100 billion cash and no debt.  BUT, it’s important to realize that not having Jobs’ recognized genius at the helm raises the risk that Apple will come out with fewer (if any) new blockbuster products.

Without blockbusters, Apple’s margins will be eroded by the competition. It's an economic certainty akin to gravity. The company has unheard of margins on their hardware right now, based on cool factor, great marketing, and being first to market.

One has to measure this risk (lack of their former captain) before investing in Apple. Right or wrong with which way you bet, a fundamental part of the equation has changed, and you have to take this risk into account.

Amazon-

Speaking of Amazon, I went online to purchase Michael Lewis’, “The Big Short” on the financial crisis we faced a few years back, and Amazon informed me I could download it for free to a Kindle if I had one, (as I already have an Amazon Prime membership.) I don’t own a Kindle, but darned if I wasn’t tempted as hell to buy one to rent the book for free (up to 12 per year.) This is excellent marketing by Amazon, keeping users loyal, piquing my interest to a product I wasn't previously cnsidering purchasing, as well as differentiating their product through these new advantages.

The same as Netflix is attempting to do through their own content, the same as Apple being first to market with novel products. 

Not only did I consider purchasing a Kindle, it made me think to purchase stock in the company. But that’s a whole different evaluation, I just point out that if YOU like something, and find yourself a repeat customer, it generally bears further investigation.

The key here, boys and girls, is product differentiation, and it's akin to Warren Buffett's "moat."  When considering stock, consider the true competitive advantages a company has that would be tough to overcome. That's what Netflix is trying to do, Apple has been doing for years and is right now in a stall, and an area where Amazon is making a strong case for itself. 

If you have any thoughts, please feel free to leave a comment below. 

Compare and Contrast

Make sure to take a look at the Motley Fool's latest premium reports for Apple, Amazon, and Netflix. They're designed to provide you with relevant insights that will enrich your portfolio and help you become a better investor.


margiecfl has a long position in Apple. The Motley Fool owns shares of Apple, Amazon.com, Netflix, and Time Warner. Motley Fool newsletter services recommend Apple, Amazon.com, Netflix, and Time Warner. 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.If you have questions about this post or the Fool’s blog network, click here for information.

blog comments powered by Disqus