By DAVID MOON, Moon Capital Management
When asked why a high-tech company like IPIX would locate in east Tennessee
rather than a more tech-friendly place like California, IPIX CEO Jim Phillips
responds he envisions Knoxville as 'Silicon Holler,' sort of a Silicon Valley,
but with Dolly Parton and grits. To even mention Knoxville in the same
breath as parts of the traditional tech world seemed, at best, a stretch.
In hindsight, it was prophetic.
In little more than a year, the price of IPIX stock has fallen from more than
40 to less than one dollar per share. In conservative, stoic,
'let's-celebrate-the-misfortunes-of-others' east Tennessee, IPIX is one of our
most high-profile Internet-related companies. When we think local and
Internet, we think IPIX. The company is our own local metaphor for an
Imagine, if 80 to 90 percent of your potential customers suddenly
disappeared. How would that change your business model? IPIX is not
only an Internet-related business, so are its customers ' most of whom no longer
exist. After a year of non-existent venture capital interest and massive
industry layoffs, it is almost a success if an Internet company is still
operating. That fact is lost on many of us in east Tennessee, because our
universe of local visible Internet companies is so small. We don't see the
increased office space vacancies and declining rents and home values of the more
tech-dependent Silicon Valley.
IPIX is an interesting study because of the rapidly changing rules within the
sector and investor sentiment. Eighteen months ago, analysts and many
professional investors encouraged these companies to ignore earnings and focus
on investment metrics like revenues and market share; worry about earnings
later. The key was to be the first and biggest. Almost overnight
last March, someone woke up and decreed that Internet companies should have
earnings, too. It caught the investors and company executives of an entire
industry by surprise. And with the hindsight of a few months, it was
evident the rules were dramatically changed. Today it is clear. The
landscape is littered with the carcasses of companies with no products, no
technology and no chance to ever generate any earnings. Many of these
companies were potential or actual IPIX customers. Tough
industry. Silicon Valley is in a virtual depression; all we have is IPIX '
still in business and selling a real technology, but to a vastly smaller
What are the lessons for investors? Before committing capital to any
investment, we always ask the question, 'what is the worst thing that could
happen if we buy this stock and what would cause it to happen?' That
question was completely ignored by a slew of tech investors who, instead, asked
the question: 'how much money can I make on this deal?' They never
considered that they might actually lose money.
Investors should also consider their area of competence and stay within
it. At Moon Capital Management, we have a rule we apply to every
investment we consider: the Sien rule. Sien is my wife. She spends
her days caring for our two ninth-month old kids. It's hard work, but
doesn't generate a W-2. If a company makes less money than Sien, we don't
buy it. That's the Sien rule. It causes us to miss a lot of stocks
that go from 2 to 100 dollars a share. But it also causes us to miss all
of the stocks that go from 100 dollars to 2. Some people can properly
analyze and value an industry that is not focused on earnings; some
cannot. Make sure you know which you are.
David Moon is president of Moon Capital Management, a
Knoxville-based investment management firm. This article
originally appeared in the News Sentinel (Knoxville, TN).