Betting on Hype Tech

Launches Tempt Investors to Gamble on Gadgets' Stocks, but They're No Sure Thing

For the giddy Apple groupies who spent hours, or days, in line for an iPhone, it all came down to the final reward: snagging a new technology for $600 that has yet to prove itself.

For some investors, a similar risk-reward gamble is playing out. They've jumped into Apple stock betting the hype around the gadget's launch will fatten their wallets.

So far, so good. Apple's stock has soared 43 percent since chief executive Steve Jobs unveiled plans for the iPhone in January. It closed at $122.04 Friday, two hours before the device went on sale.

But what happens now?

Many investors try to ride the cycles of product launches in the tech business. It can be a tortuous journey. Success depends on fickle consumer tastes. A killer device can create a pop-culture phenomenon. A dud can send a company reeling and flatten the stock.

Jeff Rottinghaus, portfolio manager of two technology funds at T. Rowe Price, said a lot of successful technology investors time their moves to new products, whether they're hot handsets or must-have game consoles.

"You can make a lot of money if you can pick it out early and at the right time," he said. "Unfortunately, when you're wrong, you can lose a lot of money very quickly. . . . It's very tempting, but it's extremely difficult to do on a very consistent basis."

Because of the unpredictable nature of tech products, tech stocks are significantly more volatile than those in other sectors, and stumbling blocks abound for investors. A new product could be mispriced. There could be distribution problems. Some products may feature great technology but suffer glitches or be too complicated for mass consumption. Cycles may be cut short because competitors jump into the market.

"It all depends on the success of the product relative to expectations, which are always hard to calibrate," said Kevin Landis, chief investment officer at Firsthand Funds. "People let their excitement get the best of them."

While the excitement around the iPhone reflects consumers' confidence in Apple, the buzz could end up hurting the company in the long run, especially if the device falls short of expectations. Some investors remember Apple's failed entry into the PDA (personal digital assistant) market. The company offered the MessagePad, commonly known as the Newton, an early PDA, from 1993-'98. But it never caught on, and Apple finally abandoned it. Between 1993 and 1998, Apple stock fell 73 percent.

Figuring out how long a particular product's glow will last is difficult. Motorola's stock rose substantially after it released its Razr phone in 2004. As one of the first ultra-thin phones, it caught the attention of consumers as well as Wall Street.

But when competitors introduced copy-cat phones, Motorola did not respond with sleeker models. Its stock has fallen 26 percent in the past nine months.