Once you realize that a technology company is becoming less and less relevant, pull the rip cord and move on while you still can. There is no shame in failure, especially in the technology sector, where company and sector life cycles are relatively short.
Yahoo, Dell, RIM, HP and Computer Associates are all technology companies that are in secular or terminal decline as they continue to lose market share to companies like Apple, Google and Salesforce. When a technology company is in secular decline, then the road ahead is filled with potholes, false hope and empty promises.
Only 1 notable turnaround in the technology sector tends to work each decade. Last decade it was Apple only because Steve Jobs returned to the company and in the 1990s it was IBM under Lou Gerstner, the brilliant former McKinsey consultant.
Don't Invest in or Purchase Tech Companies/Products that Are in Secular Decline
Once consumers sense that a technology company is in secular decline, they gradually use the product less often regardless of what new products are introduced by the company in secular decline. This is what happened with BlackBerry's parent Research in Motion.
Once an enterprise decides that a technology company might be in secular decline, then they no longer purchase products from the company. In many cases they even rip and replace the technology company's products as they are fearful that they won't be able to get the proper support for the underlying products in the long run.
When I used to work in the technology consulting sector at Accenture as a software engineer, I would always be neutral when it came to the decision of which database to use and I would leave it up to my clients to decide. Clients would always ask me which company is most likely to be in business in the long run.
As a result, we usually chose to deal with Microsoft's SQL Server database or IBM's DB2 database or Oracle's database Instead of Sybase, which had a less rosy long term outlook (this was a wise choice as the company was later acquired by SAP).
What Question Should We Ask Ourselves to See if a Company is in Secular Decline?
Consumer and enterprise companies will be well served to ask themselves one very basic question before purchasing a technology product, which is this: "in five years is this technology company going to be more relevant or less relevant that it is today?" This is a simple question but it has a lot to do with future technology purchases.
We can use the same logic when it comes to investing in technology companies. Technology investors should never invest in a company that they believe is not going to be more relevant in 5 years. This is why investors tend to flock to Apple, Amazon, Salesforce and Google instead of HP, Yahoo, CA, RIM or Dell (when it was publicly traded).
Quite often we see investors lose their shirts by getting seduced into investing in companies in secular decline because their valuations seem attractive. What we often overlook when chasing 'value traps' is the fact that the earnings estimates by Wall Street analysts for these companies for this year and next year and the year after are usually way too high. As a result, the valuations of these companies are incorrect.
How many of us that used to use Yahoo as our search engine and then switched to Google have ever switched back to using Yahoo?
How many of us that used to use a Windows laptop and then switch to using a Mac have switched back to using a Windows laptop?
How many of us that used to go to Barnes & Noble and then switched to Amazon have decided to go back to shopping only at Barnes & Noble for books?
Lastly, how many of us print more documents using HP printers since we purchased our first tablet? Exactly.
Investors in Turnaround Technology Investments Are Usually Tourists
More often than not, investors buying turnarounds in tech are merely 'tourists' and give up investing after realizing that there are better secular growth opportunities elsewhere; they learn their lessons from 'renting' and losing money investing in the companies in secular decline.
Given the slippery slope that technology companies face once they enter the secular decline phase of their life, it's no wonder why value investors are usually not very good investors in technology companies.
Rather, growth investors that love to invest in secular growth companies that might appear expensive on this year's earnings and next year's earnings do far better when investing in technology companies than value investors do.
So should you invest in technology companies that think they can improve their business prospects once they are in secular decline? Absolutely not.
There's usually only one company per decade that can buck this trend; I don't like those odds. If a founder comes back to the company then there is a small chance that the company will no longer be in secular decline.
When you hear Wall Street analysts or other pundits telling you that a technology company is a turnaround play, be very skeptical as the chances of a turnaround working in technology is extraordinarily low. Where there is smoke there is fire; turnarounds almost never work in technology.