One Fool has been watching tech star Autonomy soar since he began investing. Why did he never buy?
"We hate it when our friends become successful" sang miserable Morrissey in 1992.
Did he ever trade shares?
Watching a stock you've long admired but never owned rise 500% in five years is torture. There are no friends to blame -- your portfolio is your business, and it's your fault you missed out.
When I think of those who did buy Autonomy (LSE: AU) in 2004, I wish I had Morrissey's gift for pithy putdowns. A profit warning is too good for them.
Emotional? Definitely. Illogical? Guilty as charged. Investors are only human, and we can't help but be influenced by our feelings and histories, however much we read about psychological pitfalls of investing. All we can do is learn.
Boom to bust and back again
I don't really wish any harm to Autonomy's shareholders. I just wish they'd get the jitters, sell up, and allow me to buy closer to the price when I first looked into it.
That was in 2004. With a background in computer science, I'd watched the dotcom boom and bust with a professional rather than an investing perspective. Autonomy shares had peaked at over £30, turning founder Mike Lynch into a dollar billionaire.
By 2003 though, Autonomy was one of many dotcom darlings littering the market like stock ticker tape after a parade. Baltimore, Marconi, Lastminute.com, Scoot and QXL were all down over 90%.
Autonomy had fallen 97% to below £1 a share by late 2002. In hindsight this was the buying opportunity of a lifetime.
Autonomy was no basket case. Everyone from blue chips to governments was buying its search technology, which enabled companies to locate data across their burgeoning networks. Despite acquisitions, it had $100 million in cash. Far from going bust, the company, which reports in dollars, was profitable, with 2003 sales of $55 million generating net profit of over $6 million. Gross margins were obscene.
You'd have made 15 times your money if you bought at 2002's low and sold at the start of June 2009. Virtually nobody does that of course, but even in 2004 the shares were yours for 150p. Autonomy bounced around for months -- it wasn't until late 2005 that the price hit £3 again.
Unfortunately, I began stockpicking as an old school value investor and looked for a healthy dividend yield. Autonomy has never paid one, so despite my fancying the company, I ruled it out immediately.
Even ignoring the dividend, the shares were on a forward P/E ratio of over 60 and a historic one in triple digits!
The value shares I was buying had P/E ratios of under 10. I'd have been more likely to buy a unicorn.
Growth expectations
A pattern was established. I'd spot Autonomy's results and wonder again if this was Britain's tech giant. Growth was explosive -- up to 100% year-on-year.
Yet I never bought.
My early value shares did okay, but as the bargains vanished I learned from GARP-orientated investors like Warren Buffett, Jim Slater and Peter Lynch. I still avoided blue sky stories, but I did buy companies without dividends or on higher ratings, if growth looked cheap and I liked the story.
But Autonomy never looked cheap, and by 2006 the recently-floated Google also worried me. It seemed sure to muscle into the corporate search market where Autonomy operates.
I now understand -- again in hindsight -- this fear was misplaced. Autonomy's search solutions are based on mathematics, rather than Google's brute force approach. Its patented algorithms provide some protection, as does the fact it sells software that runs locally.
Finally, I worried growth was unsustainable. Autonomy sells software, rather than services, and there had to be a limit to customers?
20,000 companies later, it's yet to hit it. What's more, because of its focus on shipping software, Autonomy has grown profits faster than sales -- it doesn't need many more people to create and support its products despite selling them to far more customers.
The price isn't ever right
Autonomy is now a FTSE 100 stock with a valuation of £3.5 billion. Gross margins remain very high at 90%. While total sales are up nine-fold since 2003, net profits have increased 24-fold.
Autonomy's Q1 2009 results showed no let up, marking 24 consecutive quarters of year-on-year growth.
Now, this is where I'm supposed to tell you about the lessons I've learned. And it's true that I do feel I'm potentially a better investor for watching Autonomy.
The key lesson is growth shares can make you a fortune if they keep growing, even if bought on a pricey rating.
The trouble is, few companies grow for years like Autonomy. This means any rational investor always looks to the end.
Today the shares are still expensive in price-to-earnings terms, with a forecast P/E of 23. But on a PEG rating of 0.3, they're still cheap by this favourite measure of growth investors.
On the never never
Autonomy is now benefiting from U.S. legal legislation that means companies are desperate to retrieve related voice, email and chat data from their networks.
Any old search can find fields in a database, but Autonomy's can look for five similar bits of straw in a haystack. Some think this legislation alone could fuel growth for years.
So will this £3 billion giant become a £10 billion one, or even a £30 billion rival to the U.S. tech behemoths? I wouldn't bet against it, especially if it continues gobbling up the competition.
And yet I've not bet on it, either. I still don't own Autonomy shares, except via index trackers. Perhaps I'll never be objective about this share.
Autonomy dipped towards £7 in the panic in October 2008. I was a buyer that month, but I didn't buy Autonomy. It's since doubled.
As Morrissey also sang, "Heaven knows I'm miserable now".
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