Before Spy jumps on my back, I feel it is pertinent to mention that currently I own no shares of BEA Systems at the moment, but when the opportunity presents itself on a valuation and a technical basis, I will own shares. Ditto for Checkpoint Software. That doesn't preclude talking about BEA Systems and 'shopping lists' once things have bottomed out and some forward estimates on earnings move out of the 'twilight zone' at the moment. Why? De facto standards usually present a risk aversion that is attractive for investors because the companies end up making more money over the years than could have been originally forecast in the early going in comparison to other investments. That doesn't make much sense considering the past two years in the Nasdaq and what happened to equities, but it will over the years going forward.
So, no rude comments Spy because I know where you are coming from, but we also have to look forward beyond the trough as to what will or might rise out of the ashes. Will these companies face long base building periods and plenty of overhead resistance in the next 12 - 24 months? You bet. However, there will be opportunity for investors based on the merits of EPS growth over the years and more 'in line' valuations being adhered to going forward once the bottoming process is completed for the companies that the target markets are centering around for using their technology solutions.
What I need help with is understanding how BEAS can become the 800 pound gorilla as EMC and CIEN have and/or are becoming?
We should start right there. We could argue about whether or not either of those two companies currently qualify as meeting the critieria for a 'gorilla'. The term '800 pound gorilla' is one described to portray a dominant company in a space - be it Dell, Phillip Morris, EMC, Nokia, Applied Materials, Home Depot, Wal-Mart, Pfizer without regards to much more than it is big and owns a lot of the market share. However, the term 'gorilla' as defined through a series of studies, papers and books that are technology specific have refined that term to a more 'rare' quality than the glorified '800 pound' scenario. A company that has 2x the market share of its nearest competitor is easily called an '800 pound gorilla' by the media. That's fine, but one is better off digging under that to see what is underneath the hood in regards to technology to see if that 2x market share can be maintained via their technology and execution over the years. Compaq Computer was an '800 pound gorilla', but look what Dell did to them.
Companies that are more mature now that displayed a lot of criteria that were more 'secure' than Compaq over the years include Intel, Microsoft, Cisco and Oracle.
What are some of the criteria when looking under the hood?
Enabling hardware or enabling software that meet certain criteria:
1.Discontinuous innovation
2.Proprietary open architecture
3.High barriers to entry
4.High switching costs
5.Strong value chain formation
6.Tornado market extant or foreseeable
are what one starts to focus on to narrow down the list of candidates and possible companies that qualify as a gorilla. Enabling hardware companies like Cisco (with their IOS), Juniper with their (JUNOS) are enabling hardware companies that also are tied in with a software intensive game that controls their hardware and makes it interoperate with other hardware. Microsoft's OS is the ideal example of an enabling software as it is the 'de facto standard' for desktop OS in the world. Top that off with the target market was a mass market in both the corporate and the consumer markets. That doesn't mean other operating systems don't exist - because we know they do. However, the Micorosoft OS has been the dominant standard for many years now. This is the type of stuff one looks for in technology. 'De facto' standards in a target mass market. More people use cell phones in the world than use football equipment for American style football. So, the 'mass market' appeal of the wireless industry would be on a higher level than shoulder pads if there are dominant standards and de facto standards within the industry. More people smoke Phillip Morris cigarettes in the world than eat Krispy Kreme doughnuts - yet both target a mass market. Yet, we are talking about mass markets within technology where the target market wants, loves and demands dominant standards. Who cares which one of Linux, Microsoft, Macintosh or another system is the 'de facto' standard - the market place simply wants one to be the standard so they can adopt it and build around it. In software or hardware - the market wants things they can plug into and adopt around. SCSI ports, serial ports, USB ports, wireless ports, fibre channel, IP, GE, Window's, Mac OS, Unix, Linux, 110 voltage, 220 voltage, etc... .
BEA Systems falls under the category of an enabling software product in the form of being an OS for eBusiness on the Internet. That's different than an application software market such as i2 (SCM), Siebel (CRM), Adobe, etc... . It's more in the likes of comparing to a mass market OS for enabling eBusiness applications on the Internet. So, one has to grasp what kind of mass market that is. Odds are, I'm not going to be having a need for any BEA Systems software in my household. Or a router from Juniper. Or an application from i2. So, it's not a 'consumer' oriented mass market, but a corporate and business mass target market on a global basis.
Currently, the top two market share companies (but not the only two companies involved) for enabling eBusiness operating system platforms are BEA Systems holding the number one position in market share and IBM holding the number two share. Hasn't IBM been through all of this before when they were up against Bill Gates and the Microsoft platform? ;-)
Will business continue to be enabled on the Internet by the global corporate and business markets? Highly likely. Will certain standards be adopted that hardware and software solutions center around? Highly likely.
I could go on and on, but let me send you over to this link for some more terms:
xmission.com
BEA Systems remains a compelling enabling software company. At some point, the market will settle in on a valuation that it thinks is appropriate within the market environment and the earnings estimates. It obviously wasn't "settled" when it was in the $70's or the $80's. Will it be $15, $10, $25? Who knows. However, as the process is taking place (and it looks like more will be 'taking place' today), spending the time to assemble a list of companies that are poised to do well over the next few years is worthwhile. The entire software group will have to bottom, build a base and draw interest again - so I don't think there is any rush to jump in. We have to keep in mind the softare market is a smaller niche within the larger IT spend picture of the Nasdaq and the global economy and the sentiment and the valuation process and, and, and....
Will there be investors interested in BEA Systems at $15, Checkpoint at $35, Siebel at $20, i2 at $12, Juniper at $30, Cisco at $15, Qualcomm at $40, Ciena at $30, EMC at $20, Brocade at $19, etc...? Of course there will be - both from a valuation stand point and a potential return stand point. Will all of those stocks achieve those valuations in this cyclical point in the cycle? Time will tell. In the meantime, continue your study on your 'shopping list' to focus in on a diverse basket that will cover a lot of ground. Will that time arrive this week, next month, at the end of next quarter, at the end of this year?
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