“Buy Low, Sell High” was an industrial era investor expression. Before we shifted into an information economy, investors were admonished to invest along with economic cycles, buying during recessions, selling during booms.
In today’s information economy it’s not nearly so simple. While growth occurs, companies falter and disappear (Sun Microsystems and Silicon Graphics, for example.) Meanwhile, during bad economic periods there are flourishing growth companies.
Company performance today has much more to do with whether the company’s products and services are aligned with trends, and market shifts created by trends, than the overall economy. When revenues first show signs fo faltering, often the company fails completely, unable to react to market shifts. Competitors quickly steal customers, revenue and precious cash flow. Investors frequently have little warning, or time, before company value slides into the oblivion, leaving them with negative returns.
So now it’s more important to look at trends in where product and service markets are headed than overall economic conditions. The economy won’t save a company that’s against the trend – or hurt a company that’s delivering the market trend.
Yahoo caught the early trend toward internet usage. In the early years people didn’t quite know what to do on the internet, so content providers, aggregators, and ability to search were valuable. People like Yahoo because it gave them what they wanted, and the company flourished as it became the home page for over 80% of internet users. Advertisers loved the user base, so they bought ads.
Then the market shifted. Users gained more experience, and didn’t need the aggregation function Yahoo provided. Increasingly they wanted to find answers themselves, making the quality of search more important than content. A white page with a simple box (Google) that did great searching across the entire web overtook Yahoo’s content. And, as time progressed people started using the internet as a primary location for socially connecting with friends and colleagues, making the content aggregation even less valuable. Time spent on Yahoo as a percent of time on-line began dropping:
But although this trend began in 2009, and was clear in 2010, Yahoo’s CEO kept pushing the same business model. She missed the trend.
The market kept right on shifting, and by 2011, Yahoo is in a very bad competitive position:
So, nobody should be surprised that revenue would fall – correct? It’s not that the folks at Yahoo are wasteful, or not working hard. They simply are becoming out of step with the market trend. The result one would expect is worsening results in the old, “core” business – and that’s exactly what is happening:
Meanwhile, where the eyeballs go is where the display ad revenues go as well. And with the trends, that means we would expect display ad revenu growth to move away from Yahoo – as it has done:
So yesterday when Yahoo announced sales and earnings, it was a disappointment. What increase Yahoo had in fast growing display ads (5%) was insufficient to cover the decline in search ads (down 15%). Clearly, Yahoo missed the market shift. But, the CEO did not admit that the business model was ineffective (as results indicate.) Rather, she said the company needed more salespeople!
This proclivity to look inward, as if working harder, faster and better would “fix” Yahoo, defies the reality that the company is no longer competitive given where the market is headed. Ms. Bartz can’t succeed by trying to defend and extend the traditional Yahoo business model. Yahoo doesn’t need more salespeople, it needs an entirely different business!
Alternatively, Apple exemplifies the other side of this coin. I have been an unabashed bull on Apple for months. Why? Because it does create solutions tightly linked to market trends. People, as consumers or in business, demand more mobility. And Apple’s products deliver that mobility more seamlessly and effectively than any other solution provider.
Apple could well have kept itself focused on Mac sales. Had it done so, it would likely be out of business today. Instead, Apple focused the bulk of its development on delivering products that fulfilled trends. The result has been expansion into new markets, which have delivered massive revenue gains.
Last quarter Apple sold more iPhones and even more iPad tablets (9.25million units, $6.1B) than it sold Macs (~4 million units, $5.1B.) The old business has been replaced (cannibalized) by new, growing businesses that support the market trend. iPads are now 11% of the PC business overall, and growing fast as they obsolete PCs. Combined, iPads and Macs sold 13.25 million “computing devices” which would make it second in the world, behind only HP (15.3million PCs.) Bigger than Dell, for example, that has stuck to its “core” PC business.
Because Apple is all about delivering on trends, there’s really no reason to think revenues, and profits, won’t continue growing. The shift to mobility has just taken hold, and there are legions of people still without an apps-powerful smartphone (lots of Blackberry customers out there to shift.) The shift to tablets has just started. As these trends continue, Apple is continuing to develop new solutions that keep it ahead of competitors.
Where Yahoo’s CEO wants to add more salespeople, in hopes she can push outdated products, Mr. Jobs said in the earnings call yesterday “Right now we’re very focused and excited about bringing iOS5 and iCloud to our users this fall.” Yahoo is trying to do more of what it always did, as the market moves away. While Apple keeps its collective management eyes on the future – and where the market is headed – to constantly bring new solutions that deliver on the trends.
Sell Yahoo, if you haven’t already. And buy Apple. It’s all about investing with the trends.
Note: update on “Is Cisco a Value Stock? Skip It.” In the month since publishing that blog (6/23/11) Cisco has demonstrated that it is running headlong from the rapids of growth into the swamp of stagnation. Not only has it been killing off new products, but as it announced weak results the CEO has taken to a massive cutback. 11,500 employees are being laid off, or sent off to work for other companies as facilities are being sold to a Chinese company.
Worse, the CEO is now stooping to financial machinations in order to make the future look better. According to HuffingtonPost.com Cisco is taking a massive $1.3B charge. This allows Cisco to write off various costs that are old, current and even future to the current P&L. This will inflate future earnings, regardless of actual performance, while deflating current results. The net impact is P&L manipulation designed to make the company – quarter over quarter or year over year – look better than it is actually performing. Transparency is being intentionally muddled, to hide the company’s inability to provide solutions delivering on market trends.
Cisco shows all the signs of a company in a growth stall. Unable to shift with market trends, it is now shedding products, employees and assets in an effort to pad the P&L. It is “reorganizing” the company, rather than linking to market needs. Remember that fewer than 7% of companies that slip into a growth stall ever successfully maintain an ongoing 2% growth rate. Because they are focused on internal issues, and financial management – rather being clearly focused market trends.
Don’t just skip buying Cisco – if you are a shareholder, SELL!
And buy Apple.