You already know that technology is probably the most dynamic sector in investing.
But what you may not know is that we humans aren’t really wired to understand how fast that pace of change is.
As futurist Ray Kurzweil has argued, that’s because the pace of change in technology is not just linear.
It is exponential — or accelerating.
The graph below illustrates the remarkable — and counterintuitive — implications of this difference.
Understanding that exponential growth generates change greater than you probably can imagine can give you a unique edge in betting on, or against, investments in technology.
‘Creative Destruction’ Updated
The Austrian economist Joseph Schumpeter recognized that all economic progress depends on change or what he called “creative destruction” — the disruptive process of transformation that accompanies innovation.
What Schumpeter failed to recognize is that, as time passes, this “creative destruction” occurs at an accelerated pace.
As Kurzweil put it:
“Today, we anticipate continuous technological progress and the social repercussions that follow. But the future will be far more surprising than most people realize, because few observers have truly internalized the implications of the fact that the rate of change itself is accelerating.”
Six years ago, Steve Jobs introduced the iPhone as “five years ahead of its time.” Fast forward to 2013 and today’s iPhone 5 is already a laggard compared to rivals.
What’s more, that pace of change is accelerating, just as Kurzweil predicted.
As one senior Silicon Valley executive told me here in London last week, anything in Silicon Valley that is two years old is considered passé. At the hub of global technological change, everyone is on an 18- to 24-month cell phone upgrade cycle.
So what does this all mean for investors?
Traditionally, investors — whether venture capitalists or stock market traders — have focused on identifying and making money from “the next big thing.”
But as the life cycle for technological change has compressed, so has the life cycle for technology companies.
On the one hand, you’ll make money by investing in tomorrow’s exponential growers.
On the other, you can make potentially more money, and do it faster, by betting against yesterday’s stars — the “victims” of the relentless pace of technological change.
Betting Against Yesterday’s Tech Stars
Below are three technology companies that I am betting against either in my elite trading service, Triple Digit Trader, and/or my personal portfolio, either by shorting the stock directly, or by employing sophisticated option strategies.
1. Garmin Ltd. (GRMN)
Garmin (GRMN) is a household name that was once a leader in Global Positioning System (GPS) technology.
However, in a textbook example of accelerating technological change, the advent of smartphones from Apple (AAPL), Google (GOOG) and Microsoft (MSFT) has pulled the rug out from under Garmin’s business model. Today, consumers use GPS directly from their phones — not specialized Personal Navigation Devices (PNDs). Two years ago, I purchased a Garmin app for my iPhone for $129.00. Today, I prefer to use “Google Maps.”
Glance at Garmin’s stock chart, and it’s clear that it is in trouble.
Garmin One-Year Price Chart
Garmin Ltd. (GRMN) reported fourth quarter earnings that missed the consensus estimate by 8 cents, or 10.8%. This was due to a greater-than-expected decline in the PND market. Total revenues fell 16% from the fourth quarter a year ago. Ominously, there was not a single geographical region that increased revenues. In the United States alone, revenues fell to $445 million, a decrease of 17%.
Garmin has plenty of cash and probably won’t go bust any time soon. However, it has been losing cash over the past five quarters, despite positive earnings. If it does survive, Garmin will be a much smaller company.
2. Blackberry (BBRY)
BlackBerry, previously known as Research in Motion Limited until early this year, commanded 55% of the smartphone market less than four years ago. Today, it has 3.2%.
At the end of January, the battered company unveiled the new line of BlackBerry 10 smartphones for global markets, as well as changed its company name (from Research in Motion) to that of its key product, “BlackBerry.” This is life and death for Blackberry. The BlackBerry 10 products will either catch on or the company will fail.
The stock dropped 12% the day of the unveiling of its latest products in New York.
Blackberry shares also plummeted last week as several major U.S. retailers are reporting a significant increase in returns for the new Z10, one in the new lineup of smartphones on which the company is pinning its future viability. The U.S. launch of the Z10 started poorly and weakened significantly as the days passed.
Blackberry Five-Year Price Chart
In the most recent quarter, revenue fell 36% percent to $2.7 billion, down from $4.2 billion. Analysts had expected $2.82 billion. BBRY lost about 3 million subscribers to end the quarter with 76 million. It’s the second consecutive quarterly decline for BBRY, whose subscriber based peaked at 80 million last summer.
I think the muted reception of the Z10 has cooked Blackberry’s goose.
3. Nokia Corporation (NOK)
It is hard to overstate what a dominant player Nokia once was in Europe, where I live. Aside from the high-end users of the Blackberry, up until 2008, I probably didn’t know a single person who did not use a Nokia phone.
Nokia’s remarkable downfall is reflected in its stock price.
Nokia Five-Year Price Chart
In the United States, less than 1% of respondents to a recent survey intended to buy a Nokia as their next phone. Nokia’s officials say the company’s future lies in selling “dumb” (regular) cell phones in emerging markets. If so, it is in even bigger trouble. Entry-level Android phones from Chinese original equipment manufacturers (OEMs) Huawei and ZTE, as well as from Indian OEMs Micromax and Karbonn, are hampering Nokia’s turnaround. Smartphones are getting cheaper by the month. And seriously, does Nokia’s management really think anyone will choose a regular phone over a smartphone, in say, 2018? I’d be shocked if any would still be manufactured.
Nokia tied its future in the extremely competitive smartphone market to the Windows Phone platform. Yes, Nokia is by far the most preferred OEM manufacturer for Windows Phones, owning 80% of the market. Too bad that platform only has 2.6% market share — even less than Blackberry.
I expect Nokia’s upcoming earnings release on Thursday, April 18, to drive the stock further down.
Many of these iconic brands just fell victim to the one big idea of exponential technological change.
Heck, even Apple itself — a company celebrated for its innovation — has trouble keeping up.
Play it right, though, and you can make your fortune in technology in ways you never thought possible.
To read my e-letter from last week, please click here. I also invite you to comment about my column in the space provided below.
Nicholas Vardy, CFA
Editor, The Global Guru