Technological change is a potent economic force. New technology brings new corporations to the forefront of business, while old companies gradually fade away.
Best Buy Co., Inc. (NYSE:BBY), Gamestop (NYSE:GME), Barnes & Noble (NYSE:BKS), Coinstar, Inc. (NASDAQ:CSTR) (NASDAQ:CSTR) and even Pandora Media Inc (NYSE:P) are all companies whose business models are fundamentally threatened by technological change.
Best Buy Co., Inc. (NYSE:BBY) remains threatened by the Internet
Although Best Buy has been one of 2013’s best performers, the company remains threatened by online competition.
Best Buy bulls will point out that the electronics retailer reported better-than-expected fourth quarter earnings earlier in March. Yet, those results were down significantly from the prior year. In fact, Best Buy’s earnings per share slumped by 25% compared to the prior year’s report.
Many of Best Buy Co., Inc. (NYSE:BBY)’s competitors have already gone bust (Circuit City) and others like RadioShack are struggling. Even if consumers decide they want to purchase their electronics in person, Best Buy is facing increasing competition from the electronic makers themselves (Apple Inc. (NASDAQ:AAPL)and Microsoft Corporation (NASDAQ:MSFT) have opened their own stores, while Google Inc (NASDAQ:GOOG) is rumored to be preparing its own retail operations).
That’s not to mention that Best Buy’s big box stores have gone from an asset to a liability. Many of the products that once occupied Best Buy Co., Inc. (NYSE:BBY)’s floorspace — DVDs, music CDs, video games — are increasingly being purchased through services like iTunes rather than in their physical forms.
GameStop Corp. (NYSE:GME)’s product is going digital
When Sony Corporation (ADR) (NYSE:SNE) unveiled the Playstation 4 on Feb. 20, the company went to great lengths to emphasize the console’s digital abilities. In a follow up interview, Sony’s president said that while all games would be available for digital purchase, only “some” would come on disc.
PC games shifted format from disc to digital long ago. Readers will be hard pressed to find much more than a rack or two of PC games at their local Gamestop. Meanwhile, new consoles like Valve’s Steam Box and the Kickstarter mega-hit Ouya do not even give users the option of physical games.
Investors have been concerned that Gamestop’s business would be jeopardized by console manufacturers implementing technology that would prevent new consoles from playing used games. Rumors suggesting that have plagued shares of Gamestop over the last year.
But the risk to Gamestop’s business isn’t that console makers would restrict the playing of used games; rather, video games — like music, movies and books — are increasingly purchased in digital form.
Barnes & Noble’s problem is much the same as Gamestop’s: Consumers increasingly favor purchasing digital books over physical ones. It isn’t as if Barnes & Noble didn’t see this coming. The company started selling its own e-reader, the Nook, in 2009.
Unfortunately, Barnes & Noble’s gambit with Nook looks more and more like a failure. So much so that the company’s founder and Chairman, Leonard Riggio, offered to purchase part of the company — the retail stores — in February.
Sales of Nook have lagged rival Amazon.com, Inc. (NASDAQ:AMZN)’s Kindle. Localytics reported in January that the Kindle Fire has roughly one-third of the US Android tablet market; the Nook has only 10%. This disparity is magnified when one considers that Barnes & Noble goes out of its way to sell the Nook in its retail stores; Amazon has no such retail operation.
Barnes & Noble shareholders might not be left holding the bag. If the company can sell the Nook to a larger tech company, and take its retail operation private, shareholders might walk away with some value. But as it stands now, the company is trending towards obsolescence.
Famed short seller Jim Chanos thinks Coinstar is going away
Coinstar still runs its namesake kiosks but nowadays, the company is reliant on it Redbox subsidiary for most of its revenue.
Famed short seller Jim Chanos named Coinstar as a short target early in 2012. Chanos reasoning was relatively simple: The market for renting movies was shifting from digital discs to direct downloads. As Redbox’s competitors bit the dust — Blockbuster and other video rental stores — the company would generate great profits, for a time.
But eventually, the market for movie discs would completely vanish, rendering Redbox’s operation worthless. To some extent, Coinstar seems to have made peace with this future, expanding into other forms of vending machines like mechanized coffee makers.
If Coinstar can create other machines, it might be able to survive. But if it continues to rely on Redbox, it appears doomed.
Pandora Media Inc (NYSE:P)is a new company but competition is intense
Readers may be shocked to find Pandora on this list. It’s a relatively new company, and it only went public a few years ago. Unfortunately, the company faces significant competition from a wide variety of sources, and in many ways, it’s already been surpassed in terms of quality.
Pandora Media Inc (NYSE:P)’s extensive competition includes private companies like Slacker Radio and Last.fm. On the public front, it competes with giants like Microsoft (Xbox Music), while both Google and Apple are rumored to be creating their own versions of an Internet radio. But Pandora’s biggest challenger might be the Swedish upstart Spotify.
On paper, Spotify is clearly a superior service: rather than just allow users to listen to radio stations, Spotify lets listeners pick specific individual artists and songs. So why hasn’t Spotify wiped the floor with Pandora yet? Spotify’s problem is that its free version is only available on desktop computers. To use Spotify’s service on a mobile device, consumers must cough up a monthly fee.
For now, Pandora Media Inc (NYSE:P) might be safe. But if Spotify can get its free service on mobile devices, watch out.
What should investors do?
Investors holding shares of these companies should realize that they are betting on corporations with highly suspect futures. Given the trends in technology, the companies on this list might not survive another five years. That isn’t to say that shares in these companies are destined to fall to $0 — a going-private transaction or takeover could net shareholders some value. But these stocks are dangerous; no investor should make them cornerstones of their portfolio.
The article New Technologies are Threatening These 5 Stocks originally appeared on Fool.com and is written by Salvatore “Sam” Mattera.
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