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Why “Technology” is Not A Moat

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Over the last couple of months, I have been trying to study the methods in identifying stocks that go on to become big winners in their industry. These are not your typical “value” stocks. And, while I feel hard-pressed to find another term to label this group of stocks – considering them “growth” stocks seems the most befitting in the most general sense.

Other authors have come up with their own terms to label this bunch of stocks that has been catching the attention of the media since… forever. “Multibaggers” according to Peter Lynch, “100-bagger” according to Christopher Mayer, “Rule Breakers” according to David Gardner, “100-to-1” by Thomas Phelps, and “The Next Apple” by Howard Lindzon and Ivaylo Ivanov.

Each of these texts show us indicators in identifying growth stocks from a diverse set of perspectives, but none of them mentions “technology” being the CORE factor to a growth company’s long-term run up.

Saying that that’s why “technology” is a not a moat because of this would leave both you and myself, unsatisfied. So after reading most of the material written out there about these growth stocks – I will add in my own color to justify my argument.

Let me first give a few examples of technology companies which have failed / isn’t currently doing well – with arguably amazing technology surrounding its core business – Snapchat, Yahoo, Tesla, Theranos, and Yelp. Each of these companies IPOed with a core technology proposition that would make our lives better sometime in the future. Its stocks further traded based on these expectations as well. However, their demise or disappointments came when their technology could not live up to the hype generated by its management and the media.

But that wasn’t because their technology wasn’t strong enough, such that other competitors could steal market share. I would argue that a host of other underlying factors had resulted in their technologies lagging market demands and competitive standing.

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In the most recent popular blow-up, Theranos imploded NOT because their technology wasn’t good. Chiefly, their SCIENCE wasn’t good. Researchers in-house and the ones Holmes initially consulted had said that the Theranos idea couldn’t be done with current science today. Moreover, it imploded because Holmes lied to its employees, investors, regulators, and the media, and created a management structure that embraces secrecy.

How about a pure-play tech company like Yahoo? Yahoo was once the face of the Internet – lining the frontpages of most every browser with exciting media content and services. Unfortunately, the management culture in Yahoo fell short. It “apparently shortchanged engineering in the grand scheme of things (media people were viewed as more important)”, according to Igor Markov, EECS Prof at Michigan. This resulted in the slow adaptation to mobile platforms, where Google had a leg up. According to Igor, this was also the reason Yahoo was slow to reinvent its infrastructure – which was also one of the core reasons why Google had succeeded. Yahoo worked entirely on manual indexing, while Google was solving a structural problem of automating such repetitive labor. Google prized its engineers and motivated them to self-identify and correct problems, whereas Yahoo stuck to the mantra of “if it ain’t broke, don’t fix it”.

Final example – Snap Inc. A pure-play social media tech company, Snap IPOed with Spiegel being hailed as “the next Zuckerberg”. However, there were so many things internally wrong in the management of the company from the start. Spiegel wanted control and power. He offered no voting rights shares to investors who trusted him. He “alienated his fellow executives and led to constant C-Suite turnover, most recently with the departure of Chief Strategy Officer Imran Khan”, according to David Trainer from Great Speculations. In fact, there have been reports by Bloomberg and Wired on how Spiegel created a toxic culture of gaining favors from superiors and closing off advice from their own in-house experts.

“No exec challenges Evan—no exec who lasts over a month, anyway,”

A former employee. Extracted from article – Sarah Frier, Bloomberg.

In these 3 examples, I’ve shown how technology CANNOT and WILL NOT be the core driver of a company’s growth in the long-run. Technology is an inherent commodity – and a company competing with a commodity-based product or service will fail.

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Look at Facebook’s Instagram. It blatantly copied the Snapchat’s “Story” function and created Instagram Stories. The technology and idea behind “Stories” cannot be patented because it is simply digitizing the sharing of moments, photo and video sharing. Instagram Stories has now overtaken Snapchat “Story” function in the number of people using it – and Snap cannot do anything about it.

The only time technology can help a growth company with existing moats grow is when it makes the product or service offering more convenient, more usable, more value-adding OR, helps the company make production or service delivery leaner (cut costs) or quicker.

For instance, a specialist biotech company with a strong pipeline of drugs in the late-stage of FDA approval and one or two existing profit-making FDA-approved post-marketed drugs (moats: patents) WOULD benefit from an existing technological innovation that would speed up testing or manufacturing of their drugs.

A pure-play tech company like Facebook in the early heydays, which already has an ecosystem of addicted users and has an enviable management strategy (moats: network effect, great management strategy) is why Facebook succeeded, over mySpace and the like.

Banking on superb technology “that will rule out all other technologies” is a mirage. Technology should be supported by hard demand, not the other way around.

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