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Gold Digger started his career in financial services with Bloomberg LP in New York. He played a key role in fixed income analysis for Bloomberg professional services with specific focus on corporate and municipal bond markets. Currently he is the Chief Investment Officer of a private wealth... More
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  • Tech sector selling opportunity 0 comments
    Jul 6, 2011 4:55 PM
    Nasdaq has run higher in past seven sessions straight with Nasdaq 100 gaining more than 6% in past seven trading days. Compare that to the yield on 10-year treasuries hovering near 3%. So tech sector trade is now looking very crowded as all the yield seekers pile into the sector. Most of the major contributors in the Nasdaq 100 have gained too much in this short period with Google (GOOG) up 10%, Apple (OTC:APPL) up 10%, Priceline (PCLN), Microsoft (MSFT) and Baidu (BIDU) also contributing to the gains. However, as these stocks price-in the best earnings scenario, Nasdaq composite is looking toppy here.
    We are concerned about Netflix (NFLX) in particular as the company's stock ran up almost 10% in just two days on the news of expansion plans into Latin America and Caribbean. However, looking at Netflix's business model, we wonder why they want to do that while they are not making big money in their primary market itself here in US. Netflix seems to be playing a trick on investors as investors worry about customer count while completely ignoring the other side of the equation: the cost associated with that customer acquisition. There is a tendency among the tech sector investors to reward investment by the firm with a fake promise of future earnings potential.
    This is because, unlike any other industry, cost of switching for customers from a tech company is almost negligible.
    Though there is no cheap service like Netflix around at the current time but if another ponzy schemer, who doesn't care about the cost to the company, comes around offering me $6/month unlimited movie streaming, I'll definitely switch immediately. Assuming every logical customer will do the same, I don't understand how long Netflix will be able to justify these huge investments if they are not striking exclusivity contracts with its content providers.
    Same logic applies to cloud service offerings. While cloud does have slightly higher switching costs than a DVD rental and streaming service, that cost is still not that high due to the whole model of cloud. So Amazon (AMZN) justifying cloud investment does not make sense either.
    While with current yield fishing environment, yield seekers are willing to ignore business models for the sake of extra yield. This reality will come to bite investors sooner rather than later. Sometimes gaining 4% is much better than loosing 50%. We should always be aware of the competition in tech sector as well as in our investments. We are advising investors to start taking profit in above mentioned technology names before rally fizzles out.
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