Silicon Investor (SI) -- The First Internet Community

STOCKTALK

We've detected that you're using an ad content blocking browser plug-in or feature. Ads provide a critical source of revenue to the continued operation of Silicon Investor. We ask that you disable ad blocking while on Silicon Investor in the best interests of our community. If you are not using an ad blocker but are still receiving this message, make sure your browser's tracking protection is set to the 'standard' level.

Strategies & Market Trends : Gorilla and King Portfolio Candidates -- Ignore unavailable to you. Want to Upgrade?

To: paul_philp who wrote (45769)	8/23/2001 5:24:42 AM
From: Bruce Brown	Read Replies (2) \| Respond to of 54805

I agree that software is affected by the business cycle. Hey Paul. I'm willing to accept being dead wrong about calling the business software industry a cyclical group, but I would like to hear your thoughts/debate on why it is not a cyclical sector. If we use the time line of when most of these companies have been in existance and even your 20 years in the business, it's certainly easy to nail down the latest cycle - both on the way up and the way down - as being the most dramatic. I agree that software is affected by the business cycle. I have been through a couple of {previous} recessions. However, that is not the same as being cyclical like Applied Materials and Intel. Their cycles are driven by industry specific dynamics. Once again, for the software industry we are discussing, we know we're not talking about the type of software consumers install on their computers. It's business/corporate related products that ebb and flow with the spending cycles of those businesses and their business cycles. I would be curious to hear why you don't see the software industry within technology as ebbing and flowing with the rest of the business cycle - even if you remove the latest 'bubble'. However, I don't think it is fair to remove that portion because it was one of the cycles that technology spending by businesses went through over the course of history in the IT world. Regardless of the reasons that led to that spending cycle, it did occur - as will others. It all comes down to simple supply and demand. During the economic wheel of early expansion ---> middle expansion ---> late expansion ---> early contraction ---> middle contraction ---> late contraction ---> each individual sector experiences a rotation in their business cycle that fits into the business cycle where the companies within those specific industries "perform" the best. In the early expansion we begin with transportation and move through the chain of technology ---> services ---> capital goods ---> basic materials ---> energy ---> consumer staples ---> utilites ---> financials ---> consumer cyclicals ---> and right on back to transportation where the economic cycle begins all over again. Although the software industry is not dealing with the types of "inventory issues" such as the chip industry, or the router industry, or the PC industry, etc... - they are dealing with the supply and demand of their customer spending cycles and the business cycle itself for their customers. Is that not supply/demand related which leads to periods of overcapacity during the demand phase which gets cleansed during the contraction phase? I certainly will agree with you that the intense demand (IT spending) in the late 90's led to overcapacity in the industry to meet that demand. The demand was there and that drove or stretched the supply to the overcapacity levels. The same happens in the oft quoted typical 'cyclical' industry known as the most important layer of technology - semiconductors. Demand increases, supply ramps up. Demand decreases, supply ramps down. Yes, that can get magnified within the context of a global recession/slow down. Of course, software makers also have new product cycles (such as Siebel's upcoming product or Oracle's earlier product release this year) like other technology industries which can ramp up the supply/demand surrounding those products that are not always tied to the business cycle. As this process plays out over a cycle, look how the individual games play out on the ramp up and the ramp down end of the cycle (both in royalty and in gorilla camps). Examples: Dell vs. the rest of the industry now. Intel vs. AMD now. Siebel vs. the other CRM players. All the relationships built during the ramp up phase of the latest cycle could be viewed for negatives and positives going forward. News items such as these are common in the type of environment we are in: Intel Fires Price War Salvo [AMD is still stinging from having been dropped by IBM, and was slapped Wednesday with the news that arch-rival Intel (Nasdaq: INTC - news) was going to slash its chip prices by as much 54 percent over the weekend, as had been rumored for several days.] Computer Maker Gateway Cut to Junk by S&P [.....``The downgrade reflects extremely competitive industry conditions, a declining revenue base, and the company's expectation that it will not return to material profitability until fiscal 2002,'' the rating agency said. It said Gateway, which cut prices to compete with rivals such as Dell Computer Corp. (Nasdaq:DELL - news), ``may be challenged to restore profitability to expected levels'' next year.] Siebel gloomy about tech [E-business software company Siebel Systems Chief Executive Officer Tom Siebel said the worst is yet to come for tech. "I don't think we have begun to see the carnage in information technology companies that are going to fail," Siebel said in an address to a conference organized by the Progress & Freedom Foundation. "We expect to see this turnaround around Q3 of next year." Siebel did not make any specific predictions on his software company's future earnings. But he had other nuggets to offer the audience. "We got in kind of a bubble situation. The world went crazy in the last two years. Sanity is returning." Is it going to get better this year? "We don't think so," Siebel said. ...... "My market will follow the economy at large,'' he told Reuters on the sidelines of the summit.] It's interesting to see how power and relationships are wielded during the peaks and troughs in the cycle and how that will impact the future in terms of when the recovery emerges for each individual sector. In fact, do we not see this essence as an important part of gorilla gaming in terms of weighing in the pros and cons of the dominant player in a TALC? Yes, the magnitude was very large in the latest cycle because the demand was very large at the time. Okay - huge. So, it's labeled a "bubble". We're now in the decreasing demand portion and it's labeled a 'bear market' for technology', the 'aftermath of a bubble' or simply the plain old economic business cycle wheel that turns round and round. This time, the turn was one hell of a doozy turn, wasn't it? Consolidation and failure is often accompanied in the decrease in demand portion of the cycle - be it the paper industry, the PC industry, the software industry, the router industry, the utility industry, the energy industry, the transporation industry, etc... . Yet, the stronger companies emerge well positioned for the next cycle. Some of the events and comments in my "news" examples above target that process. Recovery in 2001? Hmmm.... 2002 for some. 2003 for others. 2000 and none for yet others. Pretty much ties in with Weinstein's observations of basing patterns ranging from weeks to years. Then again, that's what it all comes down to again in terms of individual stocks, isn't it? Simple supply and demand. Walls of worry....this time it's different on the way up....this time it's different on the way down....PE's are too high.....PE's are not too high....blah....blah....blah...blah.... Supply and demand. BB