BlackBerry: A Cautionary Tale
John Chen, BlackBerry's chief executive officer, prepares for an interview from the floor of the New York Stock Exchange in New York, U.S., on Thursday, May 20, 2010. Photographer: Jin Lee/Bloomberg via Getty Images
What lessons can investors learn from BlackBerry’s implosion?
The sad saga of BlackBerry provides a cautionary tale for all investors, especially those with money in leading-edge high tech stocks.
The message is simple – either stay ahead of the curve or fail. Complacency and inertia are the parents of deterioration and demise.
We’ve seen this movie many times before. I remember when Atari was the dominant computer games company and my then teenagers insisted on buying everything that came out. And where is Atari now? Just another of the many casualties of the technology revolution.
They’re not alone. Names like Commodore, Netscape, Napster, Control Data, and Nortel have disappeared while others, such as Nokia, are on the brink. Trail-blazing products like the Sony Walkman vanished because they didn’t evolve to meet the competition from Apple.
So what does this tell us about investing in high tech stocks? Several important things.
An industry in its infancy. This is a very young industry. Most of the companies have been around for less than a generation. Apple and Google, the two current corporate giants, have only been in existence since 1976 and 1998 respectively. The notable exception is IBM, which traces its history back to 1911 when it was founded as the Computing Tabulating Recording Company (yes, computing was part of the language way back then although few people had any idea what it meant).
Young industries spawn hundreds of start-ups in what might be compared to a modern-day gold rush. Only a few will strike it rich but those that do will amass fortunes far beyond most people’s imaginations. Investors, especially those looking for fast profits, hook on for the ride.
Share prices can turn on a dime. Once a tech stock goes on a roll, the sky’s the limit. Trivial concerns like p/e ratios mean nothing; investors are more interested in the number of eyeballs being added, or wireless market share, or rapid revenue growth. But let there be one whiff of trouble and the stock can plummet. Groupon shares, for example, fell from $26 to $3 in the space of a year.
The moral of this story is that if your tech stock goes on a run, it’s prudent to periodically sell some shares to crystallize your profits and reduce your downside risk.
Constant innovation is the key to success. The companies that are always at least one step ahead are the ones that are most likely to survive, even it means reinventing themselves as they go. When Steve Jobs was alive, Apple was the undisputed leader in product development with one launch after another of technology people didn’t even know they wanted. Jobs scorned focus groups because he believed consumers couldn’t express a desire for things they couldn’t imagine. And he was right – a decade ago, how many of us could have even conceived of the idea of the iPad? Apple’s problem today is that despite the great profits many people believe that the company’s innovation phase is over. If so, it could be the next BlackBerry in 10 years.
One of the attractions of Google is that it is constantly seeking to break new ground on a wide range of technological frontiers from driverless cars to Internet glasses. The company is spending hundreds of millions of dollars on these projects, many of which will never come to fruition. But the ones that do will probably pay off big-time, as happened with the Android operating system.