I'd like to provide a basis for an in-depth comparison on this and other Y2K firms, so I posted this message on many relevant boards. Please contribute. I'll collect useful comments from all boards, distill them and repost for all to benefit.|
Although we're all familiar with the profit potential in investing in this sector, where will investor's money flow? The perception of both the public and of fund managers are likely to be skewed in favor of different firms at different times. Although flow may be partially driven by expected EPS, likelihood of survival after Y2000, etc., the bottom line is which stock will appreciate quickly and reliably, and when.
While studying Y2K stocks for some time, I've noticed patterns forming. For example, there seems to be three groups of Y2K firms:
1) software vendors for do-it-yourself customers
2) consultants that will perform on/off site
3) automated factory conversion
The general mindset of corporate America is to try to solve the problem in-house. So group #1 gets the business first. If that fails, then the tendency is to hire consultants, and so group #2 gets the business. If that fails, then group #3 may get the business.
Given this scenario, which group is the best place to diversify within at this time? There are good arguments all around. For example, will the 70% that has yet to spend $$$ prefer to use group 1 tactics this late in the game? Rationally, they shouldn't, but waiting up to now to address the issue wasn't very smart to begin with. So rational thought is out the window.
Maybe the majority will prefer to hire consultants. The problem here is that there are very few consultants left to take on additional work. Wages will inevitably skyrocket and these Y2K firms can't simply pass on all the additional costs to the customer, else clients may be motivated to buy Y2K software and do it themselves. In this group, profit margins will likely dwindle.
Maybe the majority, seeing how little time is left will simply go for factory conversion. But where are the contracts? Is it mere coincidence that factory conversion companies have announced few, if any, new contracts this past quarter? Most firms in this class have had one or more losing quarters.
This has not gone unnoticed by investors. Now that the Y2K market correction has ended, I see money flow is beginning to return into the first two groups, but not the third. It may be because it's easier for institutional investors to justify buying stock in profitable companies than unprofitable ones at this time, despite the great future potential of factory conversion.
When discussing potential, I find it important to view not only the firm's true potential but the public's perception of that firm's potential as well. The public gets its information from investor forums, annual reports, trade shows, etc. The public is probably aware of the three classes of Y2K firms, but what about the different types of technology employed by the firms? For example, some firms only perform "forward" analysis, that is, they examine code, deduce where date related code exists and makes the needed modifications. Other firms also employ "reverse" analysis, where they examine databases produced by the code, detect date patterns embedded within, and infer where in the code these dates are being created. Is it worth it? Well, if reverse analysis can improve the "first time" success rate from 90 to 95%, that reduces the manually intensive part fixing-it-by-hand from 10% down to 5%, a 50% reduction in manual labor. A significant savings.
Another question regarding technology is whether or not the Y2K firm owns all the technology they employ. If not, can they get upgrades when needed? I've written reverse date analysis software for a Y2K firm, and it's likely some other firms have used outside contractors as well.
Joint ventures and teaming agreements also play a role in perceived future earnings. The more the merrier. Then again, maybe not. Although they feed the imagination with potential income, its still not income. One way to rate the quality of a teeming agreement is to see how long it has been since the agreement was announced and then ask how many contracts came from that agreement. Having many year+ teeming agreements but with only a few short-lived contracts says a lot. Is one teeming partner getting all the work, leaving the other with rare difficult-to-do "scraps"?
I'm sure there are lots of other issues as well. For example, a firm with good potential but no cash and losing quarters may be a likely buy-out prospect. How will shareholders be affected?
Another issue regarding rebounding stock action that I find useful is what I call "hidden resistance". Large shareholders of a stock who bought on the hope of making a nice profit have recently seen their equity dissipate during the recent Y2K correction that occurred the past 2 months. For some stocks it became obvious that no one was buying, especially when the sale of a mere 1000 shares would make the price fall 50 cents. So there's nothing to do but watch price fall, equity vaporize and frustration mount. After awhile, the investor may want to "get out" as soon as it appears he can break even; so he places a sell limit on a large order and this creates a "hidden resistance" against upward price action. I've seen it happen. Although the glass ceiling could be penetrated, the lack of momentum may encourage investors to place their bets on other Y2K firms, prolonging the stall on this stock even more.
In summary, the topics mentioned above are ...
1. The relative profitability and optimal timing of the three Y2K groups
2. Money flow into less risky, profitable firms
3. Forward and reverse analysis, public perception of its power
4. Who owns the technology?
5. Are teeming agreements producing contracts? Who's getting the work?
6. Buy-out prospects
7. Hidden resistance
Finally, word has it that Gingrich is forcing Clinton to speak up on Y2K in the next few weeks. This, in my opinion, will begin the major public move into the Y2K sector. Where will the $$$ go? That's what we can work together to find out.
I invite contributions from all who have something to say on any of the above, or other relevant topics not mentioned. Every bit helps and I will compile constructive comments from all the boards into a coherent reposting.
- Mark Jurik