The Three New Rules for Tech-Stock Investing

As the company's sales climbed up that hockey stick, fixed costs would be spread over a larger and larger volume of sales, and profit margins would grow. As advantages of scale kicked in, successful technology companies would wipe out competitors that were unable to spread costs over a big enough sales volume, and that would allow the victor to increase profit margins again.

But these rules just don't fit the technology titans very well right now. How they'll fit the sector in five or 10 years is anyone's guess.

New Times, New Rules

So here are three new rules that are a better fit for the sector as it now exists.

1. Instead of hockey-stick growth, think mature blue-chip growth. Cisco Systems is a great company, but it now has more in common with a company like PepsiCo(PEP Quote) than with the technology competitors of the 1980s and 1990s or today's technology-driven competitors, such as Juniper Networks(JNPR Quote).

Cisco is now all about line extensions, about building on its strength in hardware to sell more software in much the same way that PepsiCo uses clout in cola and potato chips to grab shelf space for bottled water and "healthy" Doritos. It's all about motivating an already-hard-running sales force into running harder and harder each day. Investors who are disappointed that Cisco Systems is growing revenue by only 15% a year need to have their heads examined.

PepsiCo and Procter & Gamble(PG Quote) would kill for that kind of predictable growth. But if you're still comparing today's Cisco Systems with the technology model of the 1990s, I can understand the source of the reaction.

2. Instead of killer apps, think killer fashion sense. Why has Nokia(NOK Quote) taken over from Motorola(MOT Quote) at the top of the wireless-phone market? Because Nokia does a much better job, year in and year out, at matching its phones to the fast-changing trends in the consumer market. (Well, Nokia's ability to actually manufacture phones efficiently so that it can supply a fashion-driven market at a healthy profit does have something to do with it.)