There is never a shortage of technology companies out there, but there are very few truly genuine technology companies. Instead, almost all of the companies people call “tech stocks” are really companies that use technologies to make or to sell their products. They have no real technological advantage whatsoever. As a result, it’s difficult for them to achieve the advantage of scale that is the hallmark of great tech companies.
The secret sauce of great tech- companies
I believe that a great tech company should have a great moat surrounding its business. Of course, there will always be competition, but with a strong moat a tech company is bound to survive and even prosper from the untimely death (or bankruptcy) of its rivals. Not only that, but a great tech company will always keep its shareholders content by rewarding them with dividends and aggressive share buy backs.
Which is a better tech- company?
Quality #1: Nature of technology moat
Intel Corporation (NASDAQ:INTC) takes sand (silicon) and applies decades of research and engineering to turn it into the heart of the modern world – computer chips. The moat around its business is both high-tech expertise and intellectual property. It is difficult (impossible, really) to compete against Intel Corporation (NASDAQ:INTC) in the microprocessor market, where it has tremendous scale.
That’s because most of Intel’s costs are fixed. It has been investing billions of dollars in building state of the art plants, creating innovative technological processes and hiring brilliant engineers. But it doesn’t cost much at all to make each chip. This lack of marginal costs is what makes Intel so unique.
Apple Inc. (NASDAQ:AAPL), on the other hand, has almost no moat. True, its brand name is unique, but it isn’t indispensable. People might change their preferences and tastes overnight. You can ask Nokia Corporation (ADR) (NYSE:NOK) about it, they’ll be more than glad to elaborate on this topic. As more and more rivals enter the ring, Apple is forced to cut the price of its products and sacrifice part of its profit margins.
I understand that it’s almost inconceivable to think of Apple Inc. (NASDAQ:AAPL) as the next possible Nokia, but it isn’t that far fetched. Nokia, once a $100 billion company, now trades for a paltry eighth of that sum. It’s trading for a price/sales of only 0.3x not because it’s a value gem but because it’s losing more and more cash with every passing quarter. And remember that Nokia was the coolest company around. Its phones were sharp, cute, and endorsed by many. But that didn’t help the company a bit when consumers decided to desert hardware and shift their preference towards software and ‘touch’-capabilities.