Chicago. IL 3/9/12 (
StreetBeat) -- The implosion of Green Mountain Coffee Roasters (
Nasdaq: GMCR) last night after Starbucks (
Nasdaq: SBUX) announced its new Verismo machine, has shareholders scrambling. But within every setback lies an opportunity to learn from it, so let's take a step back and examine this development a little more closely.
What happened to Green Mountain is a prime example of capitalism at its most ruthless hour. The company's fall from grace illustrates one of the biggest dangers of investing in blazing hot momentum stocks that are being carried by a single popular product: eventually, other companies are going to join the party, and when they do, you better make sure you have what it takes to defend your economic castle.
One company that can learn from all this is SodaStream (
Nasdaq: SODA), another momo stock that has been clobbered over the past few months. The parallels between GMCR and SODA are uncanny. They both make popular household appliances that create beverages consumers usually buy retail. They're both leaders in introducing their products into the market. And by most consumer testimonials, they both actually make good, desirable, useful products. Unfortunately, that's not enough, not in the long run. Not only does a successful company have to do all that, it has to do it better than all its competitors. SodaStream hasn't met its Starbucks yet, but if its success continues, there's be no doubt that it will one day.
The hammer of capitalism is one of the mightiest forces on Earth, dwarfing even Thor's Mjölnir. Many businesses and countless fortunes have crumbled under its crushing blows. Life in a free market economy is rough. When you come up with a brilliant new idea that is guaranteed to make buckets full of money, you can be sure that competitors are going to spring up like weeds to make rival products. When the dust settles, the company on top is very often not the company who had the great idea in the first place.
This whole cycle has happened many times before. Look at Research in Motion's (
Nasdaq: RIMM) original dominance of the smartphone industry, and look at where it is today. As recently as a few years ago, the BlackBerry was the phone to have for modern, sophisticated professionals on the go. Now, RIM is bleeding market share without any way to staunch it, its two CEOs have resigned, and its stock has plunged from $144 to $13. I remember back when it was trading at $40/share, one analyst said that even though the company needed better management, the stock was a buy because it couldn't possibly go any lower. Whoops.
This is why Warren Buffett is so hesitant to invest in new, rapidly growing industries: because it's so hard to tell which companies will come out on top, and if you back a loser you can wave goodbye to your hard-earned capital. Despite the favorable dynamics of the industry as a whole, each individual company is not necessarily a good investment. Any company with a hot product can do well in an environment that's absent of competitors. Often it's wiser to wait until the industry matures a bit, the smoke clears a little, and you have a better read on which companies have what it takes to survive when they're under assault from all quarters.
For example, in the smartphone industry, that would be Apple (
Nasdaq: AAPL). Apple took everything RIM did, refined it, added its own touch (pun intended), and now makes more money than all other mobile phone companies combined. Despite aggressive attack by open source Android handsets, Apple has managed to hold its own, pulling off 100% annual growth one year after the next. Its brand has become so powerful that telecom carriers are willing to demolish their own margins just to carry its product. Unlike RIM, Apple didn't make these accomplishments in still waters, but in an open sea filled with sharks. Coming late to the party didn't hurt Apple in the least, and showing up early sure didn't help RIM.
It's still way too early to call the demise of Green Mountain, but things aren't looking good for the young company. Starbucks is quite possibly GMCR's worst nightmare. Ask your friends how many of them know about Green Mountain Coffee Roasters. Then ask them how many know about Starbucks. Starbucks has spent years and millions of dollars building up its brand and associating itself with quality coffee in the minds of consumers all over the world. Forget about bringing a gun to a knife fight...Starbucks just brought a tank to it.
Both companies are denying that they're going to go head to head against each other, citing things like how the Verismo is a high pressure machine and the Keurig is a low pressure machine, but who are they kidding? Do you really see someone having both machines in their house? Make no mistake - the battle is on. Green Mountain may very well survive this fight, and if it does, it will have proven that it has the chops to succeed in the long term, against all contenders. If it doesn't...well, GMCR shareholders have a lot to lose. $0 is a long way down.
StreetBeat DisclaimerDistributed by Viestly
Northern, WI 7/13/12 (StreetBeat) – Green Mountain (Nasdaq: GMCR) shares fall as Stifel analyst Mark Astrachan cuts its earnings estimate for the company. He reduced the earnings estimate for fiscal 2013 to $1.80 pre share from $2.27.
Northern, WI 6/11/12 (
Orlando, FL 5/3/12 (
Northern, WI 3/21/12 (
Palm Beach, FL 12/14/11 (