|  Mike Kwatinetz is a founding partner of Azure Capital Partners , an investment advisory firm focused on technology. He was formerly the global head of Credit Suisse Boston's Equity Technology Research Group. Kwatinetz has been named No. 1 PC Hardware Analyst by The Wall Street Journal and by Institutional Investor for four of the past five years and No. 2 Software Analyst for the past two years . Books The Big Tech Score , John Wiley, 2000 Investing in technology companies The material below is reproduced from THE BIG TECH SCORE, by Mike Kwatinetz, copyright 2000, with the permission of the publisher, John Wiley & Sons, Inc. -
Look for a CEO under fifty. Technology is a very fast-paced business. While age shows a certain amount of maturity and experience, I've found that a lot of CEOs begin to falter once they hit a certain benchmark. Take Digital Equipment. The company's founder, Ken Olsen, was one of the smartest people in the entire industry - but at a certain point, he lost track of where the market was heading. The PC revolution swept in and Olsen ignored it. -
Look for a 'virtual enterprise'. With new technologies it's often crucial to get up to critical mass as quickly as possible, because getting the numbers up creates an advantage both for customers and for the product. By licensing its operating system to every PC manufacturer, Microsoft made its operating system pervasive, which in turn encouraged software developers to write programs for it, which in turn attracted more users - a 'virtual enterprise' of partners. Apple, by contrast, refused to let its system run anywhere but on its own products, and has always remained an 'exclusive' product. -
Look for an 'increasing feedback loop'. Put another way, is it a product where the more people use it, the more valuable it becomes to all users, and the more valuable it becomes to all users, the more people get involved with it? AOL's buddy list allows users to type in the email addresses of a list of friends, and AOL then notifies them whenever any of those friends are online. In the first year it was offered , the service grew so popular that many people signed up with AOL just so they could use it. As more people signed up, the value of the Buddy List increased further. This became a huge competitive advantage for AOL. -
Make sure the product cannot easily be replicated. Meaning either that it would be so costly or time-consuming for a competitor to replicate it that it doesn't make sense to try, or that the product is protected by copyright, patent or trademark legislation. Texas Instruments holds many of the original patents on computer memory chips, and gets a royalty for almost every memory chip that hits the market. Xerox, on the other hand, developed the graphical user interface (GUI), Ethernet and the laser printer but didn't patent anything. As an investor, it's important to determine not only how good a technology is, but also how easily it can be copied . -
Favour strong brand names . Few competitive advantages are as difficult to fight as a brand name . An economic advantage can be overtaken eventually, a patent may be lifted, but a great brand can be sustained for years. Note that a brand can do more than retain market share. It also allows the company to launch new markets. Amazon started as an online bookseller. A few years later, it branched into CDs, DVDs, videos etc. Because it had such a strong brand, it has a sea of loyal customers, already comfortable with its site. -
Use forward earnings estimates, not historical ones. A company's value should be judged on its future prospects, not on its performance last year. Let's say you're thinking of investing in a company whose earnings per share were $5 last year, putting it on a P/E of 15. That may sound fine, until you learn that a competitor is about to release a product that is likely to bankrupt the product within a year. Basing your evaluations on historical earnings is ludicrous, especially for companies in the fast-changing technology industry, yet that is precisely what most investors do. -
Use the P/R ratio where the P/E ratio is impossible . If a company has no earnings, you cannot value it using the P/E (Price/Earnings) ratio. Such companies are obviously higher risk, and you shouldn't have more than two of them in your high-growth portfolio. But you can still value them using the P/R ratio: market capitalisation divided by consensus forecast revenue. You may be invited to invest in public companies which not only have no earnings, but have no revenue. My advice: stay away. -
Check for all three growth drivers. For real long- term growth opportunity, a company needs three factors in its favour: it has to be in a market that is growing rapidly; it has to growing its market share rapidly . And it has to be creating products or services which propel it into new markets. Be wary of the company that already has a large market share in a static market and which cannot branch out, because however good it is, the potential for growth is limited. -
Put your companies through the stock screener test. Apart from rookie companies with the potential to be superstars, any stock you hold should have revenue of at least $100 million, and have grown revenues at least 25 percent each year for the past three years. Its rate of growth decline should not be unreasonable. On this last point, growth rates invariably slow as companies get bigger, so a slowing growth rate is not necessarily a reason not to invest. But the rate of slowing should be within certain parameters. The formula for deciding what rate is acceptable is described in detail in The Big Tech Score . -
Check whether the company has met brokers ' consensus earnings forecasts in the past. Some companies are conservative in the guidance they give analysts, beating the quarterly estimates time after time. Others give optimistic guidance, then consistently come up short. Others have no bias at all. Try to incorporate this factor into your stockpicking: a company that has a history of doing better than estimates is likely to be cheaper in reality than its P/E suggests. And a company that routinely does worse , more expensive. www.azurecap.com 'Timing is everything. It didn't take a genius to figure out that tech stocks were overvalued long before the peak of the boom. But you could have lost a lot of money going short on the way up, and several fund managers lost their jobs because they kept out of the market bonanza.' ”Laurence Copeland |  |
