Of all characteristics that sets the high technology industry apart from other industries, one stands out: The rapid creative destruction of high technology businesses, especially on the hardware side -- the rise of new more efficient and more effective devices that quickly replace old devices, turning winners into losers, and losers into winners. This means that investors in high-technology stocks cannot afford to be complacent, boasting about the big gains they made in the past by riding a high-tech trend with a winner, but always keep an eye on the next trend and the next winner.
Here are three such trends unfolding right now:
- The shift from PC's to mobile devices;
- The shift from the fixed line to the mobile Internet;
- And the merging between the laptop and the tablet.
The three trends aren't independent the one from the other. The rapid spread of tablets supports and re-enforces the shift from conventional to mobile Internet; and the rapid sale of tablets supports and re-enforces the need for the merger of tablets and laptops. This means that companies that are winners of one trend may be winners of another.
At the same time, the market for some devises like tablets becomes highly fractionated, and the winners will be those that can bundle tablets with the appropriate software. But which companies will be the winners of these three trends?
Clearly, Apple (AAPL), Google (GOOG), Qualcomm (QCOM), and Cirrus (CRUS) have been the winners of the first trend, while Intel, Microsoft (MSFT), and Hewlett-Packard (HPQ) have been the losers. But the mobile devices market becomes crowded as the number of smartphone and tablet makers proliferate; the market reaches closer to saturation; and the world economy continues to weaken.
Apple and Google are also the winners of the second trend, the shift from fixed to mobile Internet, while the losers are Facebook (FB) and Zynga (ZNGA), though Facebook and Yahoo (YHOO) have been rapidly catching up this trend. The problem, however, is that mobile Internet is less profitable for companies that rely on advertising revenue, as evidenced by Google's recent earnings report.
Microsoft is expecting to be the winner of the third trend, the merging of tablets and laptops. With its Windows 8/RT operating systems, Office Suite and built-in keyboard, the Microsoft Surface has bridged the gap between laptop and tablet, appealing to users who seek the full functionality of a laptop rather than having what amounts to a smartphone in a tablet.
The shift from PC's to mobile devices
Shift from fixed line to mobile Internet
Facebook, Zynga, Yahoo
The merging of tablets and laptops
Apple, Google, Amazon (AMZN)
The bottom line: Investors in high technology industry cannot afford to be complacent, as the industry is constantly under the forces of creative destruction, whereby winners quickly turn into losers, and losers into winners.