One of the most fearsome threats a business faces is the chance of simply becoming obsolete. Sometimes, this threat is quite clear; at other times, it just sneaks up on you, turning what seems to be an undervalued position into a value trap.
Even today there are many examples of this dynamic around us -- some obvious, others still only speculative. Since the situations vary wildly, I will mostly focus on specific industries or products, and try to name some affected stocks where they can be found.
Not long ago, paging was a nascent industry, filled with growth and huge cash flow generation. Once the companies had their wireless networks built up, the money simply rolled in from the subscriptions.
Then along came cellular telephony, SMS and wireless data. And pretty soon paging was thoroughly obsolete, only surviving in very specialized applications (niches) while the subscribers slowly bled away.
For a while, there were several quoted stocks in this sector, trading at deep discounts. The discounts weren’t innocent, and were not value opportunities; they were admission by the market that obsolescence was unavoidable.
Presently, while a large number of small paging companies can still be found, the quoted stocks are rare and small. I only managed to find Aquis Communications Group, a penny stock, and USA Mobility (USMO), which is facing the unrelenting erosion of its messaging business, and is trying to diversify by acquiring a company outside that line of business.
Yellow Pages, Directories
As recently as 5-6 years ago, the Yellow Pages were seen as a stable business meriting a large (sometimes huge) premium for their cash generation. Yet it was already obvious then that obsolescence was around the corner. The huge growth of the internet, together with the growing popularity of search engines – particularly Google (NASDAQ:GOOG), which was already turning into a verb -- meant that soon people would stop opening those huge paper directories.
The Yellow Page debacle was particularly heavy in Europe, where stocks such has Yell Group, Pagine Gialle, PagesJaunes Groupe, RH Donnelley and others had been widely promoted. In the U.S., two stocks can be found. Both IPO'd when the endgame was already obvious: Dex One Corporation (DEXO) and SuperMedia (SPMD). This presented a rare confluence – there were these incredibly overvalued stocks that were soon to be obsolete. The fall was thus magnified greatly, as seen below.
Also important, would you guess who was promoting these stocks when they were about to undergo these terrific plunges? The big brokers were. Why? Because many of these stocks were involved in investment banking operations, and there was money to be made in commissions. There’s a huge lesson to be learned here – you can’t trust research when there’s money to be made, even under very obvious situations (and the situation was obvious, I even wrote about the death of Yellow Pages back then – in Portuguese).
Those stocks named in the prior industries have already imploded. Presently, the following sectors seem to be under similar pressure:
Just 2-3 years ago, when you thought about mobile gaming, you’d think about Nintendo’s (OTCPK:NTDOF) DS or Sony's (NYSE:SNE) PSP. Then along came the iPhone, then Android, and then the iPad and tablets in general, with increasingly powerful CPUs and GPUs (Graphical Processing Units).
So it’s now pretty clear that you’re no longer restricted to a built-for-purpose device to get your mobile gaming. And indeed, you’re increasingly likely not to need one at all. Nintendo is still trying to differentiate its new Nintendo 3DS, while Sony does the same with the PSP Vita, but the writing is already on the wall. Mobile gaming will migrate to smartphones and tablets, and the built-for-purpose devices will simply fade away slowly.
Regarding these two companies, the impact will be larger on Nintendo, given that the mobile gaming business represents more of its entire business. Sony has other problems as well, but still mobile gaming is a smaller part of the enterprise.
Much like the fate of the purpose-built handheld gaming devices, the fate of the purpose-built handheld GPS is going the same route. Mostly every smartphone has GPS capability; many of the tablets also have it. It’s just a matter of time until the purpose-built handheld GPS fades away.
So will TomTom and Garmin (NASDAQ:GRMN) fade away as well? If they were tied only to the developments on the consumer GPS market, yes, they would fade away. Luckily, these companies had an additional lifeboat to turn to – the OEM automobile market. It hasn’t gone unnoticed that the GPS systems integrated into automobiles were usually well behind the handhelds in functionality, so these companies are now collaborating with the auto makers to integrate their systems, creating an escape route for their businesses.
Given this development, although the handheld consumer GPS business will fade away, it’s not so obvious that these two suppliers to that market will fade away with it.
When looking at a possible value opportunity, consideration has to be given as to whether one is looking at an obsolescence situation. Technological change is rather fast in our days, and it’s easy to get trapped in a sector that has no viable way to turn its fate around.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.