What’s the new investment theme that is beginning to permeate Silicon Valley? It’s not mainstream as of yet, but it’s bringing in great numbers and attracting attention.
I call it the “Legacy Turnaround Play.” Find an ailing technology dinosaur from the Jurassic Period (i.e. the 1990s), infuse it with new management and technology, and the shares go ballistic.
The poster boy for the strategy is none other than the former beast of Redmond, Wash., Microsoft (MSFT), founded by Bill Gates and Paul Allen.
Up until the dotcom bust, it looked like Microsoft would rule the universe forever. Almost two decades later, its Windows operating system still runs 70% of the world’s computers.
The day Bill Gates retired from active management was the day (MSFT) went ex-growth. Steve Ballmer was never more than the custodian of a gigantic legacy business that went nowhere. The shares remained stuck in the doldrums for 15 years.
Also on that fateful day the Gates Foundation sold the bulk of its Microsoft shares, investing tens of billions of dollars into US Treasury bonds.
Steve Ballmer retired in 2014, and Satya Nadella succeeded him.
Nadella possessed a vision of The Cloud that was way ahead of its time and proved dead-on correct. Since Nedella joined Microsoft, the shares have rocketed some 163%.
This has spurred a frantic search for the next Microsoft, and every legacy tech company is being put under a microscope to ascertain its possibilities.
Intel (INTC ) and Cisco Systems (CSCO ) are now in the running for “Legacy Turnaround” status, and their share prices are reacting accordingly.
Another firm that may join its ranks is Western Digital (WDC). However, the burden of proof is still on the company’s management.
Spun off from Emerson Electric Company, Western Digital was the world’s largest manufacturer of chips for handheld calculators during the 1970s, which were the cutting-edge consumer technology products of its day. When the personal computer industry showed up, it moved rapidly into hard drives.
Since then, it hasn’t really done anything new, except build bigger and faster hard drives in physically smaller sizes. The problem with that approach is that the world has been moving toward solid-state storage now for years.
The hard drive is about to become one of the great dodo birds in the history of technology. Western Digital’s shares are virtually unchanged in three years, completely missing the 2016-2018 tech melt up.
Forget about buying Western Digital (WDC) for a quick-in-and out trade. HDD (Hard Disk Drive) sales are down a dreadful 5.6% YOY.
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