On Hardware Stocks
I placed a short post on this on a Nvidia thread, but it thought I should give it a thread of its own for those who weren’t following Nvidia.
Nvidia’s CEO, who is a very bright, innovative and charismatic CEO, explained Nvidia’s current problems as a problem of pricing and an overstock of inventories.
I’m sure that he knows what he’s talking about, but overstock, inventories, pricing, order postponement, and all the rest, are a whole vocabulary of potential problems that you don’t ever think about, you don’t even ever hear, if you are not in a hardware stock.
Hardware companies have to wait for orders! It’s as simple as that. For example your best customer says, “Sorry, we may have inadvertently misled you, but it looks like we over-ordered (or business was a little slow this quarter), but we have to work off some inventory. We won’t be ordering this quarter, but we’ll look at it again next quarter.” Or “Sorry, but this competitor of yours has this product which is almost as good, but 40% off your price, so we ordered from them.” Or “I don’t think we need to order the upgraded new chips, the ones we have already are good enough.” Or “Our business has slowed down because of the economy (or a change in technology trends), so we only need half as many this quarter.” You get the point. The SaaS customer, by contrast, just pays his monthly lease because that software is essential for running his business. And he may even order another bell or whistle because he sees it will make his business run more efficiently and save him much more than the small monthly fee.
Then there’s the question of increasing your revenue. To put it simply: if you sell $100 million of refrigerators this year, to increase revenue by 50% next year, you have to sell the same number of refrigerators, and then half again more. And to increase 50% the year after, you have to sell as many as you did the first year plus 125% more. It’s clearly impossible to do that even for 4 or 5 years in hardware, unless you invent something that changes the planet, like the iPhone.
Our SaaS companies don’t have to go out and sell that first $100 million again next year. It just comes in automatically, on a lease, and maybe even there will be more bells and whistles attached next year. No customer company is going to “not order” the software that is running their company for a quarter or a year.
I, personally, decided “No more hardware companies!” after 2015/2016 when I had had major positions in Skyworks and Infinera, two tech stocks that were much beloved by members of the board, including myself. They had great stories, and great management. We thought they were taking over their worlds. Their CEO’s told us about all the orders they were expecting, and in retrospect they weren’t lying, they really thought they would get them. But then “Hardware companies have to wait for orders” happened! … Infinera, which was as high as $23 at one point while I had it is roughly $5 now (I just looked it up), and Skyworks (when Apple sneezed, it got pneumonia) which had hit $109 in 2015, and had hit $114 in 2017, is $73 right now. It’s way below where it was in 2015. Some of you may still be holding Skyworks or Infinera, hoping. Most of our stocks are up at least 500%-1000% (in as much as you could value them pre-IPO) since 2015, by comparison.
I hope this helps,