One of the biggest trends we’ve seen in the technology industry over the last decade has been outsourcing. Not just outsourcing projects to companies like Accenture or working with cloud services companies like Saleforce.com where you rent their products, but actual outsourcing of research and development on new products.
It may sound strange but it’s happening and it’s profitable.
Oracle, a database and software company, spends $0.12 of every dollar it makes in sales on research and development. This works out to $5.4 billion dollars. However, companies like Oracle don’t like to take risks. Developing new products is risky and expensive, so why bother?
It’s safer to buy than build
Picture this: a group of hotshot engineers has a great idea for a new product but doesn’t have the capital to make the vision into a company. They reach out to a Venture Capital incubator and borrow $50 million– a drop in the bucket for these guys. In 6 months, they are selling this product to their old clients from Oracle or Microsoft. Four years later, after building more and deeper relationships, they have proven their concept and go public at a valuation of $750 million.
This sounds like a pie in the sky idea but it has become common in technology.
What you have now is a public company with a proven product, established clients, and possibly even a stream of maintenance revenue that will continue as long as the product is being used. If an established company like Amazon or Oracle were to buy this company, it would be almost an automatic home run.
Why would they do this?
Sure it costs more than building the product in house, but there is no risk. Since sell side analysts let the company use the cash on its balance sheet to pay for the transaction, it makes earnings growth look better than it should. So, company management teams pay more than they need to but get a guaranteed return with little risk. That’s all the more reason to raise those eight-figure salaries.
Becoming more common as the economy slows
This situation is happening almost once a month in the technology world and YOU can profit from it. We recently saw this happen with Fusion IO (FIO), which went on our recommended list in February and recently received an offer from SanDisk. Now we’re hearing rumors that it could happen with two other companies that are on our buy list.
Make sure you get in on these stocks at the best time with Tech Stock Jackpot.
You aren’t the only bidder for corporate shares
Even in a flat or down market, a good analyst can find companies that are, or will be, attractive to corporate merger and acquisitions departments. Remember, you are not the only market for company shares, and CEO’s compensation is often based on showing earnings growth. If a company can generate earnings growth through acquisitions, it’s still a good deal.
As we head into the back half of the year and GDP growth continues to fluctuate around 0, this technique will become more common.
If you are interested in hearing more, sign up for a free trial of Tech Stock Jackpot and ask our customer service team for the buy recommendations on YELP and GlobalStar. Despite the substantial moves in each of these stocks, the value proposition is still valid. The secret is finding out WHEN to make your move on them.
Happy investing!
Tom
