2 Ways to Tell If Your Tech Stock Is Doomed

When Sony (NYSE: SNE  ) decided to kill the floppy disk in April, it was the end of a long run for one of the oldest forms of data storage.

For investors, it's a good reminder that technology doesn't last. The problem is too many stock pickers -- Warren Buffett included -- see news like this and reassure themselves there's no advantage to investing in a market that's ever-shifting. Nonsense.

A brief history of the floppy disk
In fact, it's possible to make good guesses about the future of certain technologies long before they die off. Consider the three-decade run of the floppy disk.

Introduced in 1971, the floppy gained prominence when PCs began accepting software for performing useful work that had to be saved. I can still remember my uncle working from stacks of well-organized 5.25-inch floppy disks for work he did in VisiCalc. I kept piles of flexible floppies to save the details of games played on my old Apple IIe.

Later, in college, I used 3.5-inch floppies -- an ironic name, since they were encased in hard plastic -- to save papers and other work assignments completed on my Mac or the school's PCs.

By the time I entered the working world in the early 1990s, computers had become common. Most of my work was digital and correspondingly required a digital storage mechanism. Internal hard drives did most of the work, but they also didn't offer portability. Email was crude. Portable storage was becoming a problem that Iomega, now part of EMC (NYSE: EMC  ) , helped to solve with the introduction of the higher-density Zip disk and drive. Think of it as a floppy on steroids.

In the years since, digital data has grown exponentially, leading to the rise of not just bigger, more portable drives, but also the introduction of web-driven storage services such as Box.net. Google (Nasdaq: GOOG  ) and salesforce.com (NYSE: CRM  ) have taken this idea even further by eliminating the need for personal storage devices. With their cloud computing services, data is stored on the Web.

A two-question test
Only the truly presumptuous would assume that investors could have predicted the rise of cloud computing and the end of the floppy disk. But consider these facts:

  • Had you invested in salesforce.com at the beginning of 2007 and held to today -- straight through the 2008 crash -- primarily on the assumption that cloud computing would become an attractive alternative for business computing, you'd be sitting on a three-bagger. The S&P 500 is down more than 20% over the same period.
  • Had you invested in Google at the same time, you'd be up just 4%, but you'd have also beaten the market during a period in which passive indexers lost money.

My point? You needn't be perfect, you just have to watch what's happening and put modest amounts of money behind educated guesses. And to do that, you need only ask yourself two questions.

1. What do users need?
Tech succeeds because it fulfills one of three basic needs: cost savings, productivity, or entertainment. Think about ways in which you waste money and time. Does anything stand out?

For me, communications seems ripe for an overhaul. I've spent too much money on Big Phone Plans without making many calls. It's simply easier to email, tweet, or text. Thanks to smartphones, I can perform any of those tasks anywhere, on my time, without having to find a quiet place.

And we are, in fact, calling each other less. GigaOm's Om Malik dug up some interesting statistics on this recently.

Anyone else wonder if pure-voice networks aren't long for this world, soon to be replaced by networks rigged for real-time data delivery? Cisco (Nasdaq: CSCO  ) could benefit from that. Its routers handle a plurality of the traffic crossing the Internet today. American Tower (NYSE: AMT  ) might also benefit, as telecoms seek to deploy more wireless access points to their data networks.

2. What do businesses need?
Businesses would also benefit from a better-managed data network, but with more global partnerships cropping up, I wonder if there's a long-term need for either language training or tech that translates languages instantly and accurately.

Who might benefit from that trend? Gene Roddenberry helped introduce us to the universal translator in the 1960s with Star Trek, but here in the real world, no one has invented the tech necessary to replicate that device.

On the other hand, Rosetta Stone (NYSE: RST  ) is already serving thousands of customers with its intuitive language-teaching software. Normalized net income has more than doubled over the past 12 months.

This game is easier to play than you think. First, study where you waste money, effort, or free time. Then, think. How could your situations be improved? Chances are, a tech company is already working on the problem -- and offering you a chance to profit in the process.

Now it's your turn to weigh in. What are the big problems you see tech addressing in the next 10 years? Join the discussion in the comments box below.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Apple and Rosetta Stone are Motley Fool Stock Advisor selections. American Tower, salesforce.com, and Google are Motley Fool Rule Breakers recommendations. Google is a Motley Fool Inside Value pick. Motley Fool Options has recommended writing Rosetta Stone puts. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Tim Beyers is a member of the Rule Breakers stock-picking team. He had stock and options positions in Apple and a stock position in Google at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. You can also get his insights delivered directly to your RSS reader. The Motley Fool has written Cisco calls and owns shares of Google. The Fool is also on Twitter as @TheMotleyFool, and its disclosure policy was awesome at the old Mac OS video game, DOOM.


Read/Post Comments (2) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2010, at 5:52 PM, DDHv wrote:

    I would happily buy a PVT (hybrid PV & thermal) solar collector.

  • Report this Comment On September 11, 2010, at 1:26 PM, MegaEurope wrote:

    The key in my opinion is working tech stocks from both sides - growth and value. The prices people are paying for CRM and AMT are hugely inflated, reminiscent of the dot-com bubble.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1296080, ~/Articles/ArticleHandler.aspx, 11/26/2014 2:12:37 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement