Investing In Tech Stocks? You Need To Know This

By: ispeculatornew
Date posted: 06.30.2014 (3:00 am) | Write a Comment  (0 Comments)

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ycharts_chartOnce again, my live long & short tech trades have been fairly stable and I don’t have space to open new ones. You can see how they’re all doing here, the portfolio remains up 19% or so… hopefully I can get more action going next week! If you are investing in internet stocks and follow this blog, you surely know about my theory on the ecosystem plays. It is a cornerstone of how I’m investing, especially my more important, longer term plays. It basically explains why I think owning a combination of Apple (AAPL), Google (GOOG), Amazon (AMZN), Microsoft (MSFT) and Facebook (FB) is a winning long-term strategy.
I do not completely exclude tech stocks that don’t fit into the ecosystem criteria but I do feel like it’s important to analyze such stocks in the context of the ecosystems.
Case #1:  Netflix (NFLX) is a good example that has a perfect setup to actually profit from the growth of these ecosystems. It was able to create a fairly unique product (especially now that it has started its own content) that makes it a “must-have” on the other ecosystems. That ends up meaning Netflix is actually profiting from the growth of these players. It will be extremely difficult for other players to provide alternatives to Netflix.
Case #2:  Music: One of the reasons why I’ve been so bearish on companies such as Pandora (P) and Spotify despite loving them as a consumer is because of the dynamics involved. Ecosystem players view music as a critical way to keep consumers in their ecosystem. That explains why Amazon just launched its own streaming service, why Apple purchased Beats (in addition to iTunes), Google has Google Play, etc. The result? Insane level of competitions that will not only make it difficult for these companies to own the market but also will make it very difficult to get negotiating power with music labels, etc.
Case #3: Online Storage: When Steve Jobs was trying to convince Dropbox to sell itself to Apple, he told them that they should do it because storage was a feature. Again, ecosystem players are willing to drive margins near 0 because they see this as a way to keep users inside their ecosystem. Google Drive and Apple’s upcoming drive hav both announced price cuts while Microsoft announced that Office365 subscribers would get 1TB free!! Google’s Drive for work will now give “unlimited” storage. That is where we’re quickly going towards. If Microsoft charges $6.95 for 1TB of space and Microsoft Office, how will Dropbox get away with charging $20 for 200GB?

It’s All About Context

I personally think it’s critical for anyone investing in tech to consider any investment in context of what this company or market means in the context of the ecosystem theory.
Disclaimer: Long Apple (AAPL), Facebook (FB), Microsoft (MSFT), Netflix (NFLX) and short Pandora (P)
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