Roger, here is the last email I received from Steve Harmon's group:
_______________________________
Steve Harmon's
H I G H V E L O C I T Y
_________highvelo.com__________
Investors Should Look Beyond Picks And Shovels
The actual phenomenon of the California Gold Rush may provide clues for
investors looking at the post-boom-rush of the Internet.
Conventional wisdom for technology investing says to look for 'picks and
shovels' companies, those that sell software and hardware tools to more
established companies.
Yet if that analogy were true then how many picks and shovels companies
can we name that today are thriving businesses from the actual
California Gold Rush of the 1840s?
What the Gold Rush did was attract people to a geographical and economic
focus: gold. What it ended up doing was spawning a sustainable economy
around entirely different industries altogether not intended to directly
benefit from mining.
The rush was the kickstart for dozens of other industries: railroads,
construction, banking, agriculture, government, and more. It wasn't
intended to but it did. And the real beneficiaries of the geographic and
economic focus of the event came not during the rush itself but
afterwards.
In this way the Gold Rush and the 'Net Rush' (for lack of better term)
can be seen as catalysts. Nothing more and nothing less. Necessary steps
but with the sustainable value to yet come.
Applied specifically to technology stocks then the theory of NOT
investing in the picks and shovels of tech implies that most of the
independent, pure play companies that do niche software or hardware may
not be the ultimate winners.
History shows the ongoing winners in multiple eras are the service
companies. What the California Gold Rush example illustrates is that it
was the service-oriented companies that survived long after the last
pair of muddy '49er jeans, pick and pan were all tossed aside.
Some of the early banks came out winners. Wells Fargo made money whether
or not anyone found gold. Away from the notion of nuggets people still
had to build, buy, lend and borrow. Banking came out ahead because it
wasn't based on technology but on people's needs.
Sure, banking used technology and benefited from gold being found at
Sutter's Mill but banking served a more fundamental need.
In the era of horse and steam and rail banking was there for wide-eyed
Easterners headed West. The technology changed over the decades and
centuries but banking came out on top.
In short, the service companies that served a core function to everyday
living were the ultimate winners of the Gold Rush.
But not all service companies are necessarily great investments simply
by design.
The Net Rush began in 1995 and only a few service companies have so far
emerged. AOL, Yahoo, Amazon, eBay, PayPal (privately held) are a few of
the better-known companies. Online multi-player games such as Ultima
(private) also fit this category.
In our view most of the public companies in today's environment trade at
valuations that are still far too expensive given their short-term
prospects. AOL mitigated some of this risk by merging with Time Warner
to create a cash flow machine to aim at outlasting the Net Rush.
Amazon's intrinsic business model (handling goods) makes it an
inefficient model in terms of scalability. Yahoo is a media company
trading at a huge premium to traditional media companies in terms of
revenue, cash flow and earnings multiple.
All of this may suggest, and history from early California may show,
that the longer-term value may be to come in as-yet-unlaunched new
companies not centered on the technology per se but on the service that
the newly-opened digital frontier provides.
In 1995 the browser tapped into a digital motherlode by making it easy
to navigate a new realm of information flow. If you look at companies
such as Compaq, HP, DELL (the railmakers of the Net Rush) each is headed
into becoming a service company.
Software makers are now making the shift from selling 'software' to
selling service to 'annuitize' their balance sheets, steady out the
revenue flow.
In this way AOL got the jump on Microsoft in online services. AOL was
always selling a service via software and not software via a service.
Microsoft's business model will have to undergo radical changes to catch
up to the service model.
And so will every other technology company. Picks and shovels may not
create sustainable value, only spawn it.
- Disclaimer:
Steve Harmon, High Velocity and Broadband Investor, affiliates, agents, partners, or any other affiliated entity does not make specific trading recommendations or give individualized market advice. Information contained in this report is provided as an information service only. We recommend that you get personal advice from an investment professional before buying or selling stocks or other securities. The securities markets and especially technology stocks are highly speculative areas for investments and only you can determine what level of risk is appropriate for you. Also, users should be aware that Steve Harmon, High Velocity and Broadband Investor, affiliates, agents, partners, or any other affiliated entity may own securities that are the subject of reports, reviews or analysis in this report. Although Steve Harmon, High Velocity and Broadband Investor, affiliates, agents, partners, or any other affiliated entity obtains the information reported herein from what it deems reliable sources, no warranty can be given as to the accuracy or completeness of any of the information provided or as to the results obtained by individuals using such information. Each user shall be responsible for the risks of their own investment activities and, in no event, shall Steve Harmon, affiliates, agents, partners, or any other affiliated entity be liable for any direct, indirect, actual, special or consequential damages resulting from the use of the information provided.
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