These three companies just didn't live up to Mr. Market's expectations last week. Whether the target was set by the company's own management, by Wall Street analysts, or by the market at large, that miss can have serious consequences, and share prices can take a serious slide as a result.
Sometimes an earnings stumble is a signal to sell, but digging in the dirt is also a good way to find turnaround candidates while they're getting beaten down. Today, it's a tech bonanza as one firm heads toward oblivion, another downgrades its own prospects, and a third falls off its old laurels.
Place your bets, gentlemen
First up, I'm wondering how long it will be before Transmeta
So far this year, Transmeta has laid off 130 employees, and there are just 65 staffers left on board. The company counted more than 440 full-time employees once upon a time, back in 2001, and as many as 221 at the end of 2005. How far the tiny have fallen.
Management now says it will focus on its core operations -- selling licenses for its intellectual property. Customers include AMD
I hate to see another "patent troll" on the market -- a company that does nothing but collect license revenues for aging but important ideas. Many of them then become lawsuit machines, desperate to squeeze cash out of every major potential patent user out there, and by then it's all about enriching the remaining handful of executives at all costs. There's no guarantee that Transmeta will become such a putrid operation, but there aren't a lot of other places to go now. It's a shame, really.
Rack 'em up!
Moving on, we got an earnings warning from computer system builder Rackable Systems
CEO Tom Barton cited "intense competitive conditions for business at our largest customers," forcing Rackable to accept lower contract bids just to keep the party going in some of the company's fattest accounts. The stock price dove more than 17% on the release, despite some upbeat comments from Barton about winning those contested deals and staying in the data centers of companies like Microsoft and Yahoo!
But the company is really fighting for its life here. Three customers contribute more than 60% of its revenues, and losing any one of them would be a crippling blow to the business. That's not the strongest of all possible bargaining positions, particularly in a well-served market like server systems.
It's hard to stand out in that crowd, so when management talks about stabilizing gross margins through product innovation, it's difficult to take that reassurance at face value. It looks like Rackable might have to go fishing for some new clients, if only to diversify its income base a bit -- or else get used to running on vanishingly thin margins.
Rock down to Electric Avenue
Let's end this sad spectacle with a real household name. Electronics retailer Circuit City
Do you remember Electric Avenue? That was the electronics department at Montgomery Ward. In business since 1872, the department-store chain failed to adapt to new market environments and went out of business seven years ago. Circuit City is riding an eerily similar track from being a highly respected and successful retailer with great management to having the competition eat its lunch while the company desperately tries to fend off the inevitable.
In this case, it's a combination of big-box broad-line retailers and archrival Best Buy
Fellow Fool Ryan Fuhrmann says it's "game over" in the electronics retailing sector, and Circuit City lost big time. I couldn't agree more. There goes another Electric Avenue down the tubes.
Some of these underperformers are victims of larger circumstances, while others might have only themselves to blame. It's up to you to decide which down-on-their-luck companies should be able to pull themselves up by the bootstraps and which really are stuck in the mud. Come back next week, and we'll take a look at another batch of mishaps and disappointments. It'll be fun and educational.
Further Foolish reading:
Seeking great deals on unfairly punished stocks? Philip Durell and his merry band of Fools at the Motley Fool Inside Value newsletter service are standing by to help you find great stocks at ridiculously low markdowns. Try a 30-day trial subscription to see whether bargain-hunting is right for you. Microsoft is an Inside Value pick; Yahoo! and Best Buy are Motley Fool Stock Advisor recommendations.
Fool contributor Anders Bylund is an AMD shareholder but holds no other position in the companies discussed this week. He bought a couch from Montgomery Ward three weeks before the chain went belly-up. So much for extended warranties. The Fool has a disclosure policy, and you can see his current holdings for yourself.