It’s now fashionable for investment commentators to point to a meteoric sales growth rate, sustained over several quarters of business activity, as the most important indicator of a business worth considering for investment. But a healthy sales volume for products, nevertheless, incorrectly priced, may not pay for the operating cost of a business.
An article written by Tiernan Ray, and published on the Barrons website on Saturday, September 21, 2013, BlackBerry Won’t Be the Last Victim of “Disrupters” is an example of this kind of exposition.
To understand Tiernan Ray’s concept of businesses as disrupters, one needs to buy into his notion of disruption. Disruptions can be defined as a type of business “disaster” Tiernan Ray attributes to technology companies once in an industry leadership position, but, later, merely an industry laggard. Examples of business disruptions include Blackberry, Nokia and even Microsoft. Tiernan Ray observes each of these businesses have been disrupted. They are each, in 2013, ” . . . franchises . . . displaced by newcomers . . . ” History, he claims, illustrate ” . . . those franchises never come back”.
I’m not so sure. As I I’ve noted over several posts to this blog, one of the biggest challenges facing a mature ISV, like Microsoft® is how best to put together a product marketing plan capable of sustaining the business at some reasonable size, given the level of revenue the business used to produce from the product lines disrupted by Tiernan Ray’s newcomers. Delivering Software as a Service (SaaS) via a multi tenant cloud subsription product model, historically, has NOT produced the revenue even these newcomers have required to fuel their challenges to the market leaders.
Tiernan Ray writes of two businesses he characterizes as disrupters, specifically Workday and Salesforce.com. “Workday is not profitable, but trades at 31 times this year’s projected sales, versus 3.2 times for Microsoft. Salesforce, whose earnings are a perennial matter of Wall Street debate, given that they exclude the cost of stock options, trades at 155 times the 34 cents a share it may earn this year.” These observations move me to conclude the investment community has lulled us into a mistaken set of concepts, meaning a bubble, since neither business can profitably sustain itself at present revenue levels. Even worse, I question whether dramatic growth in the sales volume of their incorrectly priced products will fix the revenue shortfall problem.
At least Microsoft is sitting on somewhere around $75 Billion in cash. I’m not sure either Workday or Salesforce.com can say the same.
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