Wednesday, July 04, 2007

Innovative Companies - Spectacular or Duds

Most Innovative Companies for 2007 by Business Week highlights their 50 top choices for innovative companies. What is interesting to me is that the list contains companies that I consider "spectacular" for innovation and companies I believe are becoming "duds" for innovation. Here's my assessment of a few of these companies and how I am using the information for my stock investments.


Fizzled Out - Future Duds

Microsoft (MSFT) - Microsoft was a great business model innovator 20 years ago. DOS, Windows and Office gave Microsoft dominance in the operating system and business software business. However, what has Microsoft done lately? Hmm..... They're basically still making most of their revenue from Windows and Office. The lack of Internet strength and open source software is chipping away at their dominance.

Wal-Mart (WMT) - Wal-Mart's great innovation is an unmatched supply chain system. The hallmark of a great innovation is one that every understands and still can't copy. Wal-Mart basically put less efficient competitors, from large retailers to small stores, out of business. However, Wal-Mart is a victim of it's own success. Today, it only can win where supply chain advantages make a difference. Unfortunately, there aren't many other areas to which Wal-Mart can apply that expertise. Result, below average growth. I loved Wal-Mart when it first came to my city over 10 years ago. I no longer shop at Wal-Mart.

Dell (DELL) - Dell's made to order computer product process was a terrific innovation. It enabled Dell to make the lowest priced computers, minimize inventory, and give the customer exactly what they wanted. However, today Dell is struggling mightily. What happened? Simply, Dell's business model (made to order computers) is no longer a competitive advantage in today's market because customer now want everything and prices are very low. Dell didn't find the next killer business model.

Spectacular Display - Bright Future

Google (GOOG) - What a great business. Contextual advertising placements. Millions of indviduals partner with Google to create the content sites for the ads. Google's business increases every time a new website is created that wants to advertise. If Google can continue to leverage this partnership with Internet users, they will continue to increase revenues and grow.

Apple (AAPL) - iMac, iPod and iPhone. Need I say more. Well, yes. Steven Jobs. He's the innovator behind Apple. As long as he's there, Apple will be strong. Without Mr. Jobs, Apple will likely flounder as it did in the nineties. Remember, Apple will be a great innovator as long as Mr. Jobs is leading the company.

Amazon (AMZN) - When Jeff Bezos created Amazon.com in 1995, I thought both Jeff and Amazon would a flash in the pan. Twelve years later, both Mr. Bezos and Amazon are still here and running strong. In addition, Amazon's business model is evolving from an Internet sales company to running the backroom supply chain operations for any company. To me, that seems like limitless opportunity, somewhat like the Google business model.

How I am using this assessment

  1. I will not buy Wal-Mart, Microsoft, or Dell, no matter how cheap they get. Analysts are touting these three stocks as value stocks, due for higher future returns. Until I see a revised business strategy that is better than their declining current strategy, I will stay away from these stocks. The time to buy these stocks was 20 years ago, not today.
  2. I will periodically make purchases in Google and Amazon. I will wait for the market response to the iPhone before making a decision about Apple. I believe these stocks will have the winning strategies to enable 20+ times gains in their stock price.
Disclosure: I currently own LEAP call options in Microsoft and shares of Google.

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This is not financial advice. Please consult a professional advisor.

Copyright © 2007 Achievement Catalyst, LLC

2 comments:

Moneymonk said...

I believe AAPL wil be a winner


What are leap options?

Super Saver said...

Moneymonk,

Thanks for your comment.

Agree with you on AAPL. I just think it is a bit risky since Apple's success depends mostly on Steve Jobs.

Owning a LEAP option means that one has a right to buy (a call option) or sell ( a put option) at a certain price. I own Jan 08 40 LEAP call options. That means I have the right to buy Microsoft at $40 up until the expiration date of January 18,2008. Of course, I would only use the option if Microsoft were over $40. MSFT is currently $29.99 making the options not worth much.

By the way, I should have capitalize LEAP, which stands for Long-term Equity APpreciation.