In January you may have missed the 200th birthday of Edgar Allan Poe, celebrated American writer. One of his more famous stories was “The Pit and the Pendulum,” a gruesome tale about a dungeon made of a deep pit and a slowly descending razor-sharp pendulum. The narrator is trapped between the choice of plunging to his death in the pit or waiting for the pendulum to slice him in half while he is going insane debating the choice. Now doesn’t that kind of feel like early 2009 to you? Everywhere you turn, the news is bad. Well, maybe it’s not really that bad.
I have another pendulum metaphor that applies to the “tech wreck” of seven years ago and today’s tech market. The pendulum swings between fear and greed, good investments and smoking holes in the ground. It is the cycle that the broader market hasn’t seen since the early 1990s, so those of you under 40 probably don’t remember. But for those of us in technology, it seems like just yesterday.
Seven years ago, technology went off a cliff. Telecommunications and information technology businesses saw dramatic stock declines from the go-go days of 2000. By late 2002, the industry was downright dismal. Do the following sound familiar today? “We need to cut our expenses in case revenue falls.” “No one in this market will buy a company that’s burning cash.” “Venture funds are doing triage on their portfolio of companies, preferring to fund their existing companies and not doing new deals.” “The IPO market is dead.” These are all exact quotes that I heard from fund managers and tech CEOs in mid-2002.
For investors who wallowed in the misery of the day, it was hard to see where the turnaround might come from. If you acted on the bad news, you created a self-fulfilling prophecy and made a bad situation worse. However, if you took the long view and made investments in late 2002, you did well over the next two years. Very well.
Here are local examples of that successful emergence from the tech wreck. These are three of the largest publicly traded technology companies in Vancouver:
• MacDonald Dettwiler & Associates Ltd. (MDA) stock price appreciation from October 2002 to February 2004: 167 per cent• PMC-Sierra Inc. stock price appreciation from September 2002 to February 2004: 400 per cent• Sierra Wireless Inc. stock price appreciation from September 2002 to March 2004: 1,865 per cent
The investment pendulum clearly swung back to greed as these companies’ businesses improved. Even though it took time for the companies to innovate, sell more product and shore up their balance sheets, investors couldn’t get enough of their stock.
Now fast-forward to the end of the current salad days. All three local companies in my example grew their businesses from 2003 to 2008. MDA doubled its revenue and its earnings. PMC-Sierra doubled its revenue and more than quadrupled its earnings. Sierra Wireless quadrupled revenue and increased its earnings by 600 per cent. Their reward for putting together that string of solid growth?
• MDA stock depreciation from May 2007 to November 2008: 67 per cent loss• PMC-Sierra stock depreciation from May 2006 to November 2008: 65 per cent loss• Sierra Wireless stock depreciation from June 2007 to November 2008: 74 per cent lossThe pendulum has clearly swung away from greed and back to fear. Even though these companies are, at the very worst, flat to slightly down in revenue and earnings and are better off than other industries because they lack debt, investors are punishing them. As history teaches us, things will turn around. Are you brave enough to invest now? Or are you busy debating the choice between the pit and the pendulum?
Brent Holliday heads the technology practice for Capital West Partners, a Vancouver-based investment bank.