The Case For Investing In Hardware Companies

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Billionaire Tan Min-Liang, CEO and cofounder of Razer, speaks to Charles Li, CEO of Hong Kong Exchanges & Clearing Ltd. (HKEX), wearing a set of the Razer’s headphones during its IPO on Monday, Nov. 13, 2017. Photographer: David Paul Morris/Bloomberg

If you’re playing computer games, chances are you heard of Razer. The hardware company went public last week in Hong Kong.

It was the latest of the "first wave" of hardware startups — which started over 10 years ago — to IPO. Jawbone didn’t have this fortune and went out of business earlier this year. DJI, the Shenzhen-based drone champion, remains private and is apparently doing well.

Hardware by the numbers

The market capitalization of Razer stands currently at $4.9 billion. Fitbit trades at $1.5 billion and GoPro at $1.2 billion. Remarkably, all three companies are recording losses but Razer is enjoying a vastly superior valuation — over 12x its revenue, versus 1x or less for both the others. In 2016, Razer recorded $392 million in sales and a $60 million loss; Fitbit numbers were $2.2 billion with a $103 million loss, while GoPro was at $1.2 billion and a $373 million loss.

Why is Razer’s stock doing so well then? There is no definite answer, but here are some possible reasons.

The new wave of hardware

Most hardware-only products face the risk of commoditization — the extreme version of which I called "Xiaomization" after the Chinese giant’s low-cost, high-quality, fast-follower strategy. Even Apple wouldn’t stand a chance competing with Android devices in the long term if it didn’t launch a significantly-innovative new product every year.

But today, it seems that the future increasingly lies in products that go beyond hardware.

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Billionaire Tan Min-Liang, CEO and cofounder of Razer, speaks to Charles Li, CEO of Hong Kong Exchanges & Clearing Ltd. (HKEX), wearing a set of the Razer’s headphones during its IPO on Monday, Nov. 13, 2017. Photographer: David Paul Morris/Bloomberg

If you’re playing computer games, chances are you heard of Razer. The hardware company went public last week in Hong Kong.

It was the latest of the “first wave” of hardware startups — which started over 10 years ago — to IPO. Jawbone didn’t have this fortune and went out of business earlier this year. DJI, the Shenzhen-based drone champion, remains private and is apparently doing well.

Hardware by the numbers

The market capitalization of Razer stands currently at $4.9 billion. Fitbit trades at $1.5 billion and GoPro at $1.2 billion. Remarkably, all three companies are recording losses but Razer is enjoying a vastly superior valuation — over 12x its revenue, versus 1x or less for both the others. In 2016, Razer recorded $392 million in sales and a $60 million loss; Fitbit numbers were $2.2 billion with a $103 million loss, while GoPro was at $1.2 billion and a $373 million loss.

Why is Razer’s stock doing so well then? There is no definite answer, but here are some possible reasons.

The new wave of hardware

Most hardware-only products face the risk of commoditization — the extreme version of which I called “Xiaomization” after the Chinese giant’s low-cost, high-quality, fast-follower strategy. Even Apple wouldn’t stand a chance competing with Android devices in the long term if it didn’t launch a significantly-innovative new product every year.

But today, it seems that the future increasingly lies in products that go beyond hardware.



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