In the late 1990s, high-tech companies were all the rage on Wall Street. The Internet was poised to change the world. The leading technology companies were expected to collect huge profits, as far out as the eye could see. Networking giant Cisco
Other infrastructure companies were also expected to flourish. Chief among them was former computing powerhouse Sun Microsystems
They were right .
Sure enough, the Internet did change the world. Life today is vastly different from life 20 years ago, thanks in large part to the network launched on Cisco's routers and Sun's servers. Those two companies helped launch a revolution that radically changed the way we shop, run businesses, learn about the world, communicate, and entertain ourselves.
You can sanely argue that Sun and Cisco have done more to change the world than any company since Ford
Like cars, the Internet has become a "How did we ever live without it?" enabler of efficient, modern life, and our world has dramatically changed as a result.
. Except for the "can't miss" part
While the Internet clearly changed the world, Sun couldn't figure out how to adapt quickly enough. Although it was an early Internet leader, Sun grew complacent and inflexible. Its complex and costly Unix systems were fine for the days when research labs, government agencies, and other large, well-capitalized institutions dominated the Internet. Yet, as the Internet became larger and more widely adopted, fewer people had the money or inclination to run Sun's complex systems.
Instead, folks opted for cheaper hardware built with Intel
The price was wrong
If Sun's saga taught us anything, it's that the Internet may have changed the world, but it hasn't changed the basic rules of economics. Being the first mover in an industry only gets you so far. At some point, you have to provide superior value to customers in order to justify your market-leading position. Otherwise, competitors will offer a better value and steal your customers.
Sun investors who bought into the dream of owning the leading company at the forefront of a massive world-changing wave awoke to the nightmare of owning just another company ill-equipped to compete. Those investors could have protected themselves by remembering the classic line from legendary investor Warren Buffett: "Price is what you pay. Value is what you get." Near the peak of the tech-stock bubble, Sun shares sold for more than 100 times earnings and more than 16 times their current price.
The meltdown was painful for Sun shareholders, but it was avoidable if they'd taken a step back from the hype and hysteria and examined the company's fundamentals and financials. Investors could've avoided catastrophe just by asking themselves what Sun was worth as a profit-making business, rather than as a world-changing phenomenon.
Opportunities to profit from panic
In the wake of the burst high-tech bubble, the good news is that rational heads are starting to prevail around technology stocks. For the first time in a long time, it's even possible to label some tech companies as fairly or even cheaply priced. Take, for instance, Intuit
There was a time when value investors and technology stocks mixed about as poorly as oil and water. Those days are over. As long as prices are rational, reasonable, or even downright cheap, value can be found in technology stocks. At Inside Value, if a company is trading significantly below its true worth, we say "buy it," even if the discount happens to be found in a world-changing, high-tech company.
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