When To 'Believe the Hype' of a New Product 9 comments
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When it comes to "Hyping" a product, it is clear to most people that Apple (AAPL) has no peers. Long before people knew the total functionality of an iPod, they knew that they had to have one. In my opinion, this was the most successful product launch in recent memory, and was only topped by their next product, the iPhone.
Companies do their best to ensure that Consumers (and, Investors) are aware of what is coming out. This helps their business in several ways. One, it provides a level of "excitement" for their company. Two, it helps to ensure that people know that they are on the "cutting edge". Three, it can help to deflect away from a current offering in market from one of their competitors. Finally, if done right, it can ensure that the product has a strong demand at the time of launch, ensuring a good success.
This begs a few questions:
- Which Industries are most likely to "Hype" a product that has not been released?
- At what stage should you "Buy into the Hype"?
- How can an investor profit from all of this?
1) Which Industries are most likely to "Hype" a product that has not been released?
Among a list of the most likely Industries to hype a product, one might think of Entertainment, Consumer Discretionary and some parts of Consumer Staples market, Pharmaceutical, Technology and Automotive.
For Consumer-related products, it make sense to have a big splash, as you want to ensure that the public is well aware of what you are releasing, and what it can bring. This would hold true for Cars, MP3 players, movies and even disposable Razors (can't think of a better way to hype your product than Tiger Woods, right, Proctor and Gamble?)
For Big-Pharma and for larger Technology purchases, one would not expect that there would be such a need to drive up consumer demand. Sure, letting people know that there is a new drug for blocked arteries or a new add-on for your SAP system will create some demand, but this is not likely the main reason.
Big Pharma companies are usually marketing to Doctors and other areas of the Medical system, and not so much to the patients themselves. They need to be considered on the Cutting Edge of Health care, to maintain their stature in the minds of the Medical community. As well, much attention is being paid to the "Drug Pipeline" of Big Pharma by the analysts at Wall Street, so they need to ensure that news of how new medicines are progressing are well known, even if they are not coming out for several years.
In terms of Technology, pre-announcing new technology products or upgrades can serve a few purposes. First, it helps to protect brand loyalty, as people who are already your customers can feel comforted in knowing that you are advancing the product that they are using, and that they will be able to upgrade without having to install a brand new system. Next, one of the biggest fears about buying a Technology product, especially on a large scale, is that something better will come along before I finish rolling out. Companies who are savvy can play up this aspect to successfully disrupt the sales of their competitor's products that are currently in market. One has to be careful with this tactic, however, as it can unsettle customers to the point that they never make a decision.
Finally, like Pharma, Technology companies need have IT departments think of them as being on the "Bleeding Edge". By constantly announcing new products, you can appear to be ahead of your competitors.
2) At what stage should you "Buy into the Hype"?
Buying a company's stock based on what might come out can be a very lucrative, yet extremely risky proposition. The level of risk seems to be based on the following factors:
- How "established" is the company?
- How "buggy" have their products been at the time of launch on previous product launches?
- How far in advance are they pre-announcing a product?
- How far are they "pushing the envelope" with this new product?
First, most Start-up companies are looking for a way to get their product offering known. One of the easiest ways to do this is to announce an incredible finding or a product that pushes so far ahead of what is currently on the market. Don't get me wrong, some of these products do eventually come to market, and those who bought into the story early are generally extremely rewarded (just ask early shareholders of Microsoft (MSFT), Wal-Mart (WMT) and Google (GOOG)). However, more often than not, the average investor is better off staying out of these types of investments, unless it falls within an area of your expertise. If this is the case, it may be worth a small portion of your investments.
There is an old expression that you shouldn't buy a car in the first year of its production, as they likely haven't gotten the "kinks" out of it yet. For many years, this was probably extremely accurate, and it still may be somewhat accurate today. For this reason, Automotive is one area of the market that a smart investor might want to avoid some of the hype (As an exception to this rule, Hybrid and Electric car manufacturers may be a good place to look, even at the time of launch). Another one where people might want to be cautious is in the Corporate IT world, where large companies are showing some recent reluctance to invest in new technology upon its release, as there will inevitably be a few "Service Packs or Bug Fixes" over the first 6 months to fix glitches. The same issues do affect Consumer IT products, however, they do not ever seem to have the same impact on sales. This is evidenced by some of Apple's issues with the iPhone, but it doesn't seem to have hurt their sales very much.
Companies that announce that they have a new product coming out on the day of launch are likely taking a very conservative approach. While there are no assurances, it is likely that the product will have been thoroughly Market-tested, and should be ready to go. On the other hand, companies that announce a new drug or car that is coming out in 2013 may be a more risky adventure. Many things can happen in a 5-year period (Government regulation changes, Increased competition, Increased prices in Commodities or other inputs and more) to make this a more risky venture.
Finally, the riskier the product, the more likelihood for glory and for failure. As mentioned before, Gillette is announcing its new razor with great fanfare. Since they have been making razors for years, and since it is a fairly basic product, there is little risk in such a product failing. However, someone who is developing a Hydrogen fuel cell might have great technology and ideas, but is also just as likely to lose your entire investment.
3) How can an investor benefit from the "Hype"?
A) Invest in those companies who help other companies bring their products to market faster and cheaper
- One such example is Pharmaceutical Product Development (PPDI). Their main role is to assist Pharma companies in running the required trials for new medications. One caution is that this is not a pure play, as they also have some development efforts for new drugs of their own. Trading at just under 20x its forecasted 2009 earnings, this one is definitely not cheap, but it is expected to grow its earnings by about 20% annually over the next 5 years, making it fairly valued here.
B) Invest in those companies who supply parts or services for Hyped products
- Companies whose products/services that have been chosen to be part of a new "hyped" product may also benefit (in the short-term, especially) from an uptick in earnings and visibility. This is especially true if this new business will make up a significant part of their overall revenue base.
- In the iPod example, it is believed that the following companies were significant suppliers to Apple: Sony (SNE) (Battery), Wolfson (WLFMF.PK) [CODEC], Storage (Toshiba (TOSBF.PK)), Firewire (Texas Instruments (TXN)) and Power Management (Linear (LLTC)).
- While the overall impact of the iPod might not have been significant for Mega-Caps like Sony, Toshiba and Texas Instruments, it would have had more of an impact on Wolfson, a company with under $1B in revenue in 2007. **Please note that it is likely too late to get on the iPod suppliers "bandwagon", and this was only an example.
Other suppliers to look for include those who supply in to the following areas:
- Green Technology products
- Hydrid Vehicles
- Aerospace
- Infrastructure
One that looks promising is Precision Castparts (PCP). This company supplies many specialty parts to Airplane manufacturers and to the manufacturers of Plane engines (GE (GE) is one of their customers). Their components are quite specialized, so companies would be reluctant to switch to an alternative supplier.
The movement towards more fuel-efficient planes means that the usual turnover of planes may be accelerated. Combining this with the expected uptick in travel by Emerging markets means that there should be further demand for their products. Down about 35% from its 52-week high, this one is now trading at less than 13x 2009 earnings (fiscal year ends March 2009). With a strong RoE of over 25%, strong cash flow, and the ability to greatly raise its small dividend, this one looks like a good bet to soar.
C) Invest in the Retailer who might benefit from the uptick in Sales.
- This point is especially true if the retailer sells products that are likely to be aimed at the 12-21 year old consumer.
- The first example is book resellers. Whenever a new Harry Potter book would hit the shelves, there would be an incredible traffic spike to the stores (or, in the case of Amazon, to their web page). This not only resulted in higher sales directly from that book, but also from extra purchases from parents who were at the store, including high margin items such as Lattes. While this spike is almost for sure temporary, it would be a profitable time for those who followed this trend. Barnes and Noble (BKS) and Amazon (AMZN) are two ways to play this future trend.
- The second would be the Electronics retailers, during a release of an extremely hot game, such as Halo III. The resulting game may also result in sales of other components, such as new PCs / Video Game Consoles and Accessories. While the impact might not have a huge impact on the bottom line for long, it will also drive huge volumes of people to the store. For those retailers who excel at Marketing and Customer service, this extra traffic could prove to be quite profitable if capitalized on correctly. I would stick with quality here, and the one that comes to mind is Best Buy (BBY).
Disclosure: None
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This article has 9 comments:
Apple did NOT "hype" the original iPhone, when asked what premarketing approach Apple had for the phone, Steve Jobs answered "We had NONE."
Same with the new iPhone.
ZERO, hyping. In fact, there is hardly a company around that goes to such massive lengths to ASSURE THAT there will be NO advance information on a product prior to it's release.
So, the title is misleading, and the article is PURE SHAM where the author is either clueless, or trolling for hits.
Interesting that you say that Apple did nothing.....why is it that they pre-announced the product months in advance of launch? Why is it that they gave pictures, brochures, marketing material, FAQ answers to the carriers months before they launched (I know, as I have contacts at AT&T and Rogers who have them)? Everyone knew exactly what the iPhone was about long before it ever hit the stores.....that is EXACTLY what pre-launch hype is.
I encourage you to check out this article:
www.nielsenbuzzmetrics...
It shows:
- Apple informed the world of the iPhone in January 2007, despite the fact that it was launching in June 2007
- Quote from this web page, "“Apple’s iPhone is riding an unprecedented wave of pre-launch conversation and expectations are mounting,” said John Latona, Vice President of Client Services, Consumer Technology, at Nielsen BuzzMetrics. “Starting next week, the nature of the conversation will shift to very explicit and descriptive commentary about actual experiences with the product, and this will have a huge impact on ongoing trial, advocacy and sales.”
- Stats from the same web page: Traffic to the official corporate site, apple.com, spiked following the iPhone announcement. According to Nielsen//NetRatings, the iPhone section of the site had 1.79+ million unique visitors in January 2007 and the keyword “iPhone” was searched 870,000 times. Consumers continued to visit the site during February and March frequently, with more than 980,000 unique visitors per month, with a slight decline during April (almost 637,000 unique visitors). Web traffic to the site increased again during May with more than 701,000 unique visitors a month prior to release.
Maybe Apple didn't fully intend to have this kind of publicity, but you can't honestly tell me that this product didn't launch with perhaps the biggest hype of any new product in recent memory?
Cheers
Larry
I know of a stronger challenge in Canada, with Comwave's main product (like Cisco, also a VoIP product), where it dragged out for much longer and was much more of a threat to Apple's launch of the iPhone. The Cisco one seemed to be settled quickly, as I recall.
Doubt that was an intentional part of Apple's plan, but I am sure that they enjoyed the free press!
I just wanted to point out that the purpose of the article was not to slam Apple......I think they did a miraculous job, in fact, and I say so in the article. People seem to become extremely defensive about this company when they sense (incorrectly in this case, I might add) that someone may be saying something bad against it. The purpose of the article was to examine whether product (and more importantly, Sales and Earnings from the product) live up to the hype and how investors might gain for it. It wasn't meant to be a forum on Apple, but it appears that it may have become so...
I guess like Apple's legal challenges, it doesn't matter why people read, as long as they read....=)
Larry
The iPhone had buzz without having to hype it up.
To reiterate what I said earlier, my point wasn't to focus in on Apple, only to use them as an example. It just seems that when you use the word "Apple" in your work, people disregard everything else and get defensive.
Thanks for taking the time to read and to comment!
Larry
I wanted to reinforce the fact that I am ABSOLUTELY NOT criticizing Apple. Their ability to create Buzz, Hype or excitement (however you wished to call it) is one of the incredible reasons for their success. While there may be some great technology to their products, it isn't the technology that makes people line up for hours.....
This implies whether they are actually intentionally creating the buzz/hype/excitement themselves or whether it is just the media (I found your comment on the iToaster funny, by the way). I listened to a great interview with an Analyst on Bloomberg where he referred to Apple as the "Media-Masters". Creating hype for your product is not a negative thing on its own, it is only negative if you constantly develop products that do not live up to such hype. Apple is not one of those companies. The iPod is a fabulous piece of technology, as is the Mac product line (I own about 5 or 6 Apple devices in my house, thanks to my wife and child.). Haven't tried the iPhone, so I can't comment there.
The purpose of the article was to touch on the idea about how Investors can play "hype" to their advantage.
Again, many thanks for taking the time to read my article, and for your comments.
Cheers and thanks
Larry