The late Steve Jobs was said to possess a “reality distortion field,” a charisma that got people to jump through walls for him, and drew capital to him, even when results weren’t going his way.
But who has the biggest reality distortion field today?
It’s clear that many tech companies don’t have one. Microsoft doesn’t have one. Intel doesn’t have one. Hewlett-Packard and Dell don’t have them.
But some companies do, and here we’ll discuss why, with some hints as to what you can do to profit from them.
Oracle’s Ellison
The oldest reality distortion field in technology belongs to Oracle Corporation (NASDAQ:ORCL) and its living Guy Fawkes mask, CEO Larry Ellison.
Oracle has successfully used its dominance of database technology in ways Microsoft could only dream of. Revenues are up four-fold since 2003, from $9.48 billion to $37.12 billion. Profits have risen in line with that, from $2.31 billion in 2003 to $9.98 billion in its most recent fiscal year, which ended last May.
All this has given Ellison enormous street credibility, which he’s used to buy out competitors, raise prices on customers, and continue on his proprietary path.
All this has created a substantial reality distortion field that obscures the fact that Oracle is missing the biggest technology turn of the decade, cloud computing. The “Oracle Cloud” consists of high-priced Sun servers and proprietary Oracle Corporation (NASDAQ:ORCL) software, not the commodity products which deliver savings people are looking for.
Say that, however, and get ready to be flamed. I’d say that’s a substantial distortion field you have there. It protects Oracle’s stock price, up almost 16% over the last year, but that price is starting to meet resistance, especially after what most consider a disappointing earnings report for February, with flat revenue and lower net income. Investors are paying 15.34 times those earnings for Oracle Corporation (NASDAQ:ORCL) shares, but if the company fails to deliver in the current quarter, ending next month, the curtain will have been pulled behind the wizard, and the fall could be harsh.
Google’s Page
Since becoming CEO of Google Inc (NASDAQ:GOOG) in April 2011, co-founder Larry Page has presided over the growth of both a company and a legend that rivals Jobs’ own legend.
Over the period sales are up 40%, net income about 20%, but few seem concerned about that deceleration. They blame the acquisition of Motorola last year, which was considered necessary in order to acquire patents to key mobile technologies, protecting its Android mobile operating system.
But those patents have proven ineffective in court. Motorola has indeed had its negative effect on margins, but it hasn’t helped Google Inc (NASDAQ:GOOG) prevent a further fracturing of the ecosystem. Amazon’s Kindle might as well not be an Android at all. Samsung, the key OEM, is experimenting with its own new OS, Tizen. The Chromebooks that seemed to be a coup are turning into an anchor around the company.
Google’s strategy advantage remains in place. Its cloud is the most cost-effective way of doing anything on the Internet, because it uses commodity servers, recycles energy, and owns its own fiber. But other companies now know the recipe, and are eating into that strategic advantage.
Right now, investors are willing to pay 24 times the last 12 months’ earnings for Google stock. They are expecting exceptional acceleration on both the top and bottom lines. Google is preparing to run out its biggest risk yet in Google Glass, which has long been pushed by co-founder Sergey Brin.
My view is that this is a game Google Inc (NASDAQ:GOOG) will lose, and perhaps deliberately, because losing would discredit Brin and leave Page alone at the top. If you own Google shares during this next year you are in for a bumpy ride, because the promised acceleration in results just isn’t coming for you.
Of course, Jobs had his bad years, too. And Page just turned 40 in March. At that age, Jobs was still two years from taking back the reins of Apple, a has-been mucking about with failed computer designs and a struggling animation company called Pixar.
But I believe, along his way, even if he becomes a business legend in his own right, Page will need more than one lesson. And he’s going to get more than one lesson.
The disclosure at the bottom of this story will tell you I own stock in Google Inc (NASDAQ:GOOG). I own exactly 10 shares, and sold the other half of my holdings at a substantial profit a few months ago, at $808. The company passed that mark on April 23, but it’s based on an “earnings beat” which, as I’ve noted elsewhere, is mostly technical.
Yahoo’s Mayer
The best reality distortion in technology today, however, belongs to Yahoo! Inc. (NASDAQ:YHOO) CEO Marissa Mayer.
Mayer was the ambitious executive Page let go as he cleared the decks at Google for financially-oriented yes-men. She is given credit for Google Inc (NASDAQ:GOOG)’s clean home page, and many other innovations, some of which worked and some of which, like Google Health, failed.
Mayer’s age, she’s 37, and her sex are just part of her story. The key point about her is that she is an engineer. And she has steered Yahoo! Inc. (NASDAQ:YHOO) away from its decade-long sloth as a content company, back into the main path of progress and profit.
But if you think Mayer has delivered bottom-line results to Yahoo, you’re mistaken. She has used her reality distortion field, which has driven the stock up 55% since her July 16 hiring, to shake the company to its foundations. But the financial gains have all resulted from the company’s long-time investments in Alibaba, the Chinese e-commerce site, and Yahoo Japan. Her sale of half of Yahoo’s stake in those companies helped catapult the shares upward, and the fact that Yahoo still holds 20%, so Alibaba results appear on its own books, have done the rest. In fact, Yahoo! Inc. (NASDAQ:YHOO) today has less revenue than it did in July – it has not grown. Because of the extrordinary gain of last year, the company appears to have a PE of just 7. Take that quarter out and it’s a more Google-like 25.
Mayer, however, has been making some very smart moves. Its growing mobile alliance with Apple has already resulted in a few impressive apps, and brings Yahoo inside the best online monetization scheme around. Google Inc (NASDAQ:GOOG)’s loss is Mayer’s gain, and since Yahoo is a much smaller company than any of its tech rivals, success in software will in time flow to the bottom line in a meaningful way.
I decided to get on board this train relatively early, buying 100 shares of Yahoo! Inc. (NASDAQ:YHOO) when it was down around $15/share. At their current price, $24.33, I’m looking pretty good, but instead of selling now I’m going to hang on, and wait for the next break in the halo to buy more.
That’s the thing about reality distortion fields. They’re blurry. Wait for any halo holder’s crown to appear to falter before you get on board any such company. Opportunities will come.
The article Tech’s Biggest Reality Distortion Field originally appeared on Fool.com and is written by Dana Blankenhorn.
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