Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) have been on everyone’s radar as the most promising technology companies. Cisco Systems (NASDAQ:CSCO) has also been on everyone’s radar as a potential turn around; and Amazon.com (NASDAQ:AMZN) has been the favored web-based stock among the momentum crowd. Investors should avoid all of them, plus Netflix (NASDAQ:NFLX), for all kinds of reasons that undermine visibility into the future of these companies at this point:
Apple is, perhaps, the most promising technology company, but can it maintain or even accelerate momentum? The answer is that we don’t know, as a number of factors cloud its immediate future:
Weak economy. Most of Apple’s revenue, for instance, comes from consumer products that are discretionary items in the consumer budget. A good deal of revenue comes from middle and higher education, depending on state and local budgets that have been scaled down dramatically.
Leadership vacuum. Steve Jobs' recent resignation leaves a leadership vacuum in the company that may undermine its ability to continue churning blockbuster products.
Potential competition from Google. Google’s acquisition of Motorola Mobility
(NYSE:MMI) is expected to create Apple’s first serious challenge in the iPhone market, especially in emerging markets. Already Dell Computer (NASDAQ:DELL), and Baidu (NASDAQ:BIDU) have teamed together to manufacture and market Android-based phones in the Chinese market.
Google, another promising technology company is facing its own issues that cloud its immediate future.
Weak Economy. Google’s revenue comes mostly from sales of advertisement space, which are discretionary in company budgets. This means that a weak economy or an outright recession will make a big dent in Google’s revenue.
Move into Manufacturing. With the purchase of Motorola Mobility, Google is soon to bundle together its software with Motorola Mobility’s hardware, as Apple has been doing with its iPhone.
While this strategic move may help Google to compete efficiently and effectively against Apple, it raises serious questions as to whether the company can become a good manufacturer and its blend its business model well with Motorola Mobility’s.
Developing search engines and advertising and operating platform systems requires a more liberal and entrepreneurial organization that allows employees to experiment with new things with little supervision. Manufacturing mobile devices, on the other side, requires a less liberal organization that defines the different tasks employees must perform under extensive supervision, which includes close monitoring and control.
Regulation issues. After settling regulation issues in the US, Google continues to face issues in Europe and Asia, especially Korea and China.
Cisco, a fallen angel from the Dot.com era, and long-rumored as a turn around is facing its own problems: the transition from and emerging to a mature company; growing competition from Alcatel-Lucent (ALU), Hewlett-Packard (HPQ), Juniper Networks (JNPR) and Huawei Technologies Co.; inability to keep up with competition; and, of course, its own leadership issues.
A still ascending angel from the dot.com years, Amazon.com’s immediate future is challenged by extremely low operating margins; the shifting of the book sales industry from hard copies to e-books, an area where there fewer barriers to entry; a loss of focus—the company is trying to compete head to head with Apple in wireless devices, a business outside its core competence; and a shift in momentum, due to deferral of Internet-based IPOs like Zynga and Groupon.
As we wrote in previous pieces, Netflix (NFLX) doesn’t have a sustainable competitive advantage. It doesn’t have barriers to entry. It does sell somebody else content with a technology that isn’t proprietary. It is a matter of time before its business is squeezed from all directions; and eventually becomes a commodity.
Disclosure: I am short NFLX.