How to Use "the Ballmer Test" to Find the Best Tech Investments

Lots of tech stocks come with hype. The hard part for investors is figuring out which ones can live up to it.

Appearing on Motley Fool Live to record the Industry Focus podcast, Motley Fool analyst Tim Beyers chats with host Dylan Lewis about a test he uses to try to determine if a tech company has what it takes to be a good investment and provides other advice on what to look for when evaluating a tech company.

Dylan Lewis: You invest in a lot of things, we're going to keep this kind of in the techs sandbox, because this is a tech show. But when you see that, what is kind of the threshold for you being like, you know, I am going to dig deeper, and I'm going to spend -- you know, whatever that initial glance might be -- an hour, two hours, really starting to look at this business.

Tim Beyers: Yeah, for me, it's usually pretty fast, only because I have an overdeveloped sense of this, and that's just a product of years, so for other people, you know, your mileage may vary. But the first thing I do is I use what I call the Ballmer test, which is just my silly way of saying like, does it appeal to developers? If you've never seen it, go look up, "Steve Ballmer: developers." You'll know exactly what I'm talking about, the YouTube will come up. [laughs] But Ballmer was right that developers do matter. And so when you see developers that are, sort of, coming on board and using a tool or talking about a tool, it helps.

So, for me, like, I have access to developers, so I can verify that for us, because we use Fastly (FSLY 1.40%), and I can ask our developers how we use it, and I can get Dan Ceebus telling me, I can envision 10 different things we can do with this thing, it really starts to resonate with me. Independent of that, you can use this tool called GitHub. And GitHub is -- you know, you can look up how a company's product is actually rated. You know, you can look at the star ratings for some of the software libraries they'll put up there. And all of these companies, they usually put their software up on GitHub, it's a way to organize software development. And so, yeah, look for those stars, it can be very interesting.

Also, just look for stories. Honestly, you can do a Google search, and say like, you know, name your company, developers and see what pops up. If developers are talking about this, it's usually a good sign. So, that's one thing I do. If developers are interested, and sometimes in their SEC filings they'll say like, we have X many developers that use our product. All of those things are, it's a checkbox, if developers like it, I'm starting to get interested.

Another thing I'll say is that I want to look at this from the perspective of how was the company born? So, I really like to look at the origin story. We talked about product, like, product is what I lead with, right? Something, a historical pattern that I have found is that, especially in tech, when a founder is customer zero, like, they had this problem and they were determined to build a product to solve it, that's usually a really good indicator.

And so, there are many companies like this. Fastly is like this. Artur Bergman, working at the Wikimedia Foundation, playing around with other content delivery networks not working for him, saying, screw it, I'm going to build my own. Builds his own, makes it better. That's a customer zero incident. That's Fastly being founded by a CEO, now chief architect, who says, I'm going to be customer zero here and build something better. That was also true for MongoDB (MDB -0.24%), it's also ...

Lewis: And for the folks that maybe aren't familiar with MongoDB and Fastly, Shopify (SHOP 6.24%) is like, that is probably one of the best-known and extremely [laughs] successful case studies in exactly what you're talking about there, Tim.

Beyers: Yeah, Tobi Lutke, customer zero: I'm going to build it myself, because the thing that I need does not exist. In tech, which is naturally an innovative field, when a founder comes in and is customer zero, pay attention to that.

Lewis: Yeah. I love that, because usually if that's the case, it isn't hard to find that, you know, it's going to be front-and-center in the prospectus, it's probably going to be in the About Us on the company website. Anybody who's covering it, especially if it's a lesser known company that's coming public, that's going to be in the lead of the news article about that company, that just becomes the story.