Ben Trapani

Professor Enos
Advanced Writing in the Technical Professions
4/11/16
Context Note: This document would appear as an article in the Wall Street Journal. The
intended audience consists of investors who manage portfolios containing securities in the tech
sector.

Predictable Profits from Small Cap Tech

After the dot-com collapse in the

early 2000s, there has been a pronounced
market-wide hesitancy to invest in
potentially lucrative companies within the
tech sector. Among these securities, small
cap tech stocks are considered especially
risky because of their tendency to blossom
and fail within the span of two to three
years. Technical indicators are not useful to
investors evaluating young companies such
as small cap techs, since revenue, operating
expenses and profits are subject to
significant fluctuation quarter to quarter.
Investors need an additional metric that
enables them to objectively evaluate and
compare the potential profitability of small
cap tech stocks. A metric worth
investigating is website response latency.
Website response latency is closely linked to
website traffic volume and corresponding
revenue generation, and can be easily
evaluated by the average computer user.
Website response latency is the
duration between the time at which a client
issues a request to load a webpage and the
time at which the website responds with
adequate information to correctly display the
requested page. Website response latency is
closely correlated with the volume of traffic

that visits a website. The main source of

revenue for tech small caps is advertisement
and ecommerce product revenue, which are
both directly tied to the quantity of
individuals who visit their websites. Google
and Microsoft indicate that 62% and 86% of
their respective revenues are generated
through traffic to the websites they own
(2014). An article titled Our Need for Web
Speed by Kent Alstad published on Web
Performance Today indicates that analysts
at Amazon estimate that Amazon would lose
approximately $1.6 billion in annual sales as
a result of a 1 second page load latency
increase (2012). A related article published
by Fast Company elaborated and included
calculations by analysts at Google, which
indicate that Google would be likely to lose
eight million searches per day if Google
introduced an additional 0.4 second latency
into their search (2012).
These statistics clearly point out that
webpage response latency dictates the
amount of traffic a website receives and
maintains. The statistics also indicate that
the majority of revenue generated by
successful companies within the tech sector
is directly tied to the volume of traffic
visiting their websites. The implication for

investors is simple but valuable: use website

response latency as an objective metric in
the evaluation of and comparison between
small cap tech stocks.
Quantifying webpage response
latency is not as trivial as visiting a page and
observing the time elapsed between the
request and the response. Client-side
network connection speed is an important
and often overlooked factor. Home network
speeds within the United States typically fall
in the range of 15-20Mb/s, which is about
6x faster than the average home network
speed of 3.5Mb/s in South Africa (IT News
2012). Page load latency is influenced by
many factors independent of the size of the
actual web page requested. Typical webbased applications are built on top of a stack
of services which work together to fulfill
requests. This stack is referred to as the
companys technology stack. Typical
technology stacks will have anywhere from
five to ten services running on separate
compute nodes within the cloud
infrastructure hosting the website. These
typical arrangements are characterized by
high tail latency (Suresh 1). High tail latency
is a description of latency distributions in a
pattern such that most all operations
complete well within the desired latency
window, but a significant portion of these
same operations take five to ten times longer
to execute than is acceptable.
Tail latency is the most important
metric to pay attention to when analyzing a
webpages response latency. The presence
of tail latency in typical calls such as form
submits, button clicks and other simple
operations indicates that the core structure of
the companys backend service is unable to
scale. If certain operations fall significantly
beyond the acceptable latency window, it is
likely that the companys technology stack
is poorly architected or there are
components within the system that are
unstable or poorly written. Contention over

shared resources is likely present as well. If

multiple backend services are competing for
access to a synchronized resource, the
cluster will only be able to perform as
efficiently as the slowest node or most
expensive request, prohibiting the system
from scaling with traffic and demand
growth. Any of the above indicate the
companys inability to scale, both in terms
of the increase in traffic necessary to
generate positive earnings and in terms of
scaling their product offerings and labor
force. Tail latency also poses a short-term
cost to a tech company. If one in every ten
requests fails to be fulfilled within the
standard one second window, the company
will lose approximately one tenth of its
potential revenue from the website due to
the lost traffic.
When making decisions as to where
to allocate funds among the densely
crowded marketplace that is small cap tech,
it is crucial that investors take into account
the latency characteristics of the websites in
which they are effectively investing. Many
tools exist that enable basic users with
internet access to evaluate the latency
characteristics of a given website. Three
popular tools providing such functionality
are Pingdom, dotcom-tools, and
WebSitePulse. These three tools are well
documented and combine to give investors
the three crucial pieces of information
needed to evaluate a small cap tech
company: historic page load latency, website
response time, and typical page load latency
per geographic location. Pingdom provides
historic web page load latencies for a given
URL, which allows investors to filter out
companies who have products displaying
characteristics of high tail latency. dotcomtools provides users with page load latencies
for locations all over the world, which is
crucial information to know when
considering the companys potential user
base and potential for growth. WebSitePulse

can be used to determine the detailed

metrics behind a websites response time,
which indicate the quality of their cloud
infrastructure in addition to the quality of
their backend technology stack.
Despite market saturation within the
tech sector, the sector has grown about three
times as fast as the rest of the U.S private
sector since 2004 (The Guardian 2012).
Many small cap tech stocks have huge
upside potential as a result. Due in part to
the dot-com collapse, the valuations of these
securities are below what is to be expected
even in a saturated market. The ability to
objectively quantify each tech companys
current profitability, current reach and
expected future value will give
knowledgeable and tech-savvy investors an
edge in the lucrative tech sector.

References:
Africa's Top Ten countries with fastest internet speeds | | IT News Africa- Africa's Technology
News Leader. (2012). Retrieved April 03, 2016, from
http://www.itnewsafrica.com/2012/04/africas-top-ten-countries-with-fastest-internet-speeds/
How One Second Could Cost Amazon $1.6 Billion In Sales. (2012). Retrieved April 10, 2016,
from http://www.fastcompany.com/1825005/how-one-second-could-cost-amazon-16-billionsales
Our need for web speed: Its about neuroscience, not entitlement- Web Performance Today.
(2012). Retrieved April 03, 2016, from
http://www.webperformancetoday.com/2012/04/02/latency-101-what-is-latency-and-why-is-itsuch-a-big-deal/
Rushe, D. (2012). Technology sector found to be growing faster than rest of US economy.
Retrieved April 10, 2016, from http://www.theguardian.com/business/2012/dec/06/technologysector-growing-faster-economy
Suresh, L., Schmid, S., & Feldmann, A. (2015). C3: Cutting Tail Latency in Cloud Data Stores
via Adaptive Replica Selection. Usenix.
Three charts explain everything you need to know about Apple, Google and Microsoft. (2014).
Retrieved April 10, 2016, from http://bgr.com/2014/02/06/apple-google-microsoft-revenuesources/