The Gorilla Game
Cree's Gorillahood Possibilities

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By TinkerShaw
April 2, 2001

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There is a tendency for people to
unintentionally elevate a really strong company into the status of a Gorilla.

This is particularly important for the LTBH investor. In the short term the latest and greatest can outperform, sometimes remarkably. But over the long haul, and as Bruce says 5-10 years, it makes all the difference.

I just did a report on Fred Hager to put the current market situation in perspective and I won't reiterate it here. But just one example. Cisco, 1994, stock crashed. People who bought at the top before the crash, even following this crash are still up 700%+ over 6 years. People who bought at the bottom are still up 1300% over 6 years. This is because Cisco's gorilla sustainable advantages were such that really the only thing that could keep it down was bad macroeconomic conditions, or short-term product transitions.

For non-gorillas, you just cannot have the same faith to hold through good and bad.

Cree at the moment is very early in its market. I would have faith to hold it through good and bad at the moment, BUT ONLY BECAUSE ITS MARKET IS SO YOUNG AND SMALL that large armies of competitors have not come on line yet to try to take some of the excess rents that Cree earns.

It all goes back to basic economics, that in a free market, where excess profits can be earned, competitors will enter these markets and eventually reduce these profits to zero. The gorilla phenomenon in technology structurally removes the economic mechanism. Cree does not enjoy such an advantage. It appears to currently because the market is so young and not yet attractive enough to attract a plethora of new entrants.

Again, this does not mean you don't buy and hold Cree. What it means is you remain vigilant. Are competitors catching up? NTAP is in such a situation at the moment. The NAS market has finally hit a critical mass that it is now large enough to draw many competitors who are serious about taking market share. Prior to this a competitor would make an attempt here or there to enter, but no real major intrusion occurred. Now we shall see. NTAP's markets are being beseeched as competitors finally enter its market en masse from the top (EMC, SUN, HP, DELL) and the bottom, as well as this BlueArc thing, which I won't take much notice of until it actually sells a product that displaces NTAP. If NTAP survives this with its market share it will have proven itself a gorilla. Only a gorilla could survive such serious market intrusions unscathed.

To put it into perspective MSFT, CSCO, INTC, along with some newer gorillas like SEBL, possibly Juniper (high speed NGN routers) and not-yet but close Rambus, and a bit more speculatively but possibly BEAS do not have these problems. Once they have set the standard they don't really have to worry about competitors entering en masse. In contrast, Cree does need to worry. There is some question as to whether NTAP needs to worry, but there is no doubt that Cree needs to worry.

There will come a point where competitors will be able to produce 3" wafers of good quality, Cree had better be on 4" or 6" wafers by then.

Due to valuation concerns and general frenzy, much of this discipline was lost by myself as well as many others. But gorilla gaming is about the long-term hold and extraordinary returns at reduced risk. I'd like us to resume gorilla discipline and really identify what is what. For Cree the answer is clear, a company with strong barriers to entry, but not impenetrable. NTAP, a company in which we just don't know if it is a gorilla but should soon find out. BEAS, with the Sun scare, should put us on our toes to reevaluate whether or not it has established a gorilla toe hold or is really just inside a rented gorilla suit as I never imagined the possibility of Sun bundling something on their servers that could displace BEAS. This may be the case, but the possibility requires further analysis.