Entertaining article from Jubak on future technology, disruptive innovations, etc. Dell, AOL and Broadcom fans will like this: ......
moneycentral.msn.com
Tech picks for the revolution
We're about to enter a period when disruptive new technologies drastically alter the sector's landscape. Here's how to put together a long-term strategy for investing in technology over the next decade.
By Jim Jubak
What's the value of a company that could put you out of business?
Just ask Cisco Systems (CSCO), which recently paid $7 billion and change for Cerent, a company that has recorded about $10 million in sales during its entire three-year existence.
Cisco was willing to pay up because its management knows that optical switching technology that can send an individual optical signal down the correct optical fiber -- without having to slow it down by converting it from light into electricity and then back to light -- could upset the entire pecking order in the networking industry. The right optical switching product theoretically could knock Cisco off the top of the mountain and, over time, turn it into an also-ran. True, it's only potential, but as Intel's (INTC) Andy Grove has so succinctly put it: "Only the paranoid survive." Jubak's Journal Community
Join the discussion in the Market Talk with Jim Jubak Community.
Farsighted technology investors need to heed this lesson in what a company with a disruptive technology is worth. Cisco is willing to pay a premium for the right company. And so should you. It's worth paying something extra (less than $7 billion in most cases, I'd suggest) to get a stake in the technologies that have a good shot at dominating the next decade.
Moreover, I think we're about to enter one of those periods when change in one industry causes change in other sectors. The duckpins now falling in the PC industry, for example, will knock over more than a few of the companies in the Internet sector.
All this leads up to a long-term strategy for technology investing that can help you decide what stocks you want to own and what prices you're willing to pay for them.
In this column, I'm going to lay out a general framework for thinking about revolutions in technology and the prospects of technology companies. In my next column, I'm going to apply that thinking to the revolutions in optical networking, broadband wireless and distributed application software.
Technology's circle game
Technology runs in cycles. While innovation is constant in technology-based industries, huge innovations that turn an industry upside down are relatively infrequent. A huge innovation -- the PC, for example -- sweeps through the market, creating new giants such as Intel and destroying the leaders of the old order. Then, for 10 years after the breakthrough, the technology and the industry settle down to improving steadily and exploiting the promise of that initial breakthrough.
During that period of maturation, new technologies that promise a revolution will spring up. But the revolution will fail to gain momentum -- usually because the champions of the maturing technology can manage to wring greater efficiencies out of their business. Eventually, though, the moment arrives when a new technology teams up with an irresistible economic edge to sweep the old order into the dust bin. It's an unusual company that can survive the upheaval. For example, IBM (IBM) is the lone meaningful survivor of the age of mainframes to thrive in the age of the PC.
The world isn't suffering from any shortage of theories, but nobody knows precisely why technology revolutions often come in bunches. It's unusual for a single industry to go through this turmoil alone. The PC revolution, for example, was accompanied by a revolution in consumer electronics as chips replaced tubes. Names such as Sperry and Burroughs in the computer industry disappeared at about the same time as RCA and Sylvania were falling from eminence.
A threat to the old order
I think we're now at one of those nodes when disruptive technologies threaten the status quo. And I think this revolution could cut an extraordinarily wide swath in the technology industries. Thanks to developments in optical networks, wireless phones, distributed mass computer storage and what are now called appliances, I think there's the potential for drastic change in the leadership of the majority of technology-based industries.
I don't think that means an investor should sell off every "old" technology leader. I think Intel and Cisco and Dell Computer (DELL), for instance, have more than a little life left in them. Nor does it mean that you should gobble up at any price every company that promises the moon. Most companies championing disruptive technologies wind up failing. Instead, I think it makes sense to divide technology sectors into tiers of stocks.
Take a sector that I call Internet access, for example. Currently, PC and modem-based 56K Internet access is a commodity. Consumers increasingly buy on price and companies increasingly compete on price. One result of this price-based competition is that the number of companies in the sector declines. The most efficient competitors make almost all the profits while the less-efficient companies rack up big losses and eventually go out of business.
At a stage like this in a sector, an investor wants to own Intel, and not 3Com (COMS), MCI WorldCom (WCOM) and not AT&T (T), America Online (AOL) and not, well, frankly, anybody else. The best commodity companies will have efficiencies of scale and capital that enable them to show above-average and remarkably consistent earnings growth. Think General Electric (GE), to use an example from an earlier stage of technology.
It's clear to me that broadband Internet access is headed for commodity status within the next five years.
Tomorrow's commodities
It's not too hard to spot the emerging technologies that will become tomorrow's commodities. For example, it's clear to me that broadband Internet access is headed for commodity status within the next five years. Right now competition isn't on price, it's on qualities such as innovation, superior engineering and ease of use. A company like Broadcom (BRCM) is a star in this emerging commodity stage because it can push out an incredible stream of new products, each making the last one (and those of its competitors) obsolete in a matter of months.
But I think we can see what's coming. Someday not too far off, a consumer will be able to walk into a store, pick up a fast Internet connection in a box -- maybe DSL or cable modem -- take it home and install it with no more difficulty than installing a modem today. The name of the game then will be brand and price, just like it is in the commodity market of today.
Details
--------------------------------------------------------------------------------
Company Report
1-yr Chart
Earnings Estimates
Companies that are the leaders in an emerging commodity market will show faster growth than companies in a mature commodity business. They'll show bigger profit margins since competition isn't on price. And the few that manage to break out of the pack and come to dominate their sector as it reaches maturity will generate well-above-average returns for themselves and for investors. The stocks of these companies are clearly riskier, but they also could be extremely profitable for investors.
And finally, investors can see the companies with disruptive technologies. Often, more than one disruptive technology threatens the mature and emerging commodity companies in a single sector. For example, in the Internet-access sector, designed appliances that don't use a PC at all to connect to the Internet might use a non-Intel chip. They might need to be produced so cheaply that manufacturers would start giving design wins to a system-on-a-chip house like LSI Logic (LSI) over a Broadcom. Or they could be sold with Internet access service built in so that the consumer wouldn't even need to think about America Online.
Most of the companies that attempt to sell products based on disruptive technologies will go out of business. The count of companies that have tried to produce some kind of handheld computer runs upward of a score, for example, and new contenders pop up every day. It's not even certain that the leader in this sector, the PalmPilot, will turn into a successful mass-market consumer product. Deciding which early stage company will emerge from the pack to become the next Broadcom, let alone the next Intel, is an extremely difficult task. Very rewarding if you get it right; very expensive if you get it wrong.
When we're talking about the companies that upset the PC and Internet-access apple cart around 2000, I'd be surprised if Dell and AOL weren't a big part of the discussion.
I'm going to put off trying to get it right in the three sectors I mentioned above -- optical networking, broadband wireless and distributed application software -- until my next column. But I am going to give you a couple of my favorites in one other fast-moving field.
A couple of players
Who would I pick as having the best chance to build a mass market in cheap consumer devices for browsing the Internet and for running software that's stored on the Net? Dell Computer.
Think about what's likely to be needed for success in this sector. Efficient manufacturing to keep down costs. The ability to quickly meet changes in consumer demand. A willingness to buy components from other companies without getting hung up in the "Not invented here" syndrome. And distribution that cuts costs to the bone. That sounds like Dell to me. The company, which recently took over the top spot in sales of PC-based servers, has shown that it can dominate a sector even if it's not the first into the market.
Jubak's Archives
--------------------------------------------------------------------------------
Recent Jubak articles:
? Does vision justify prices of RealNetworks, JDS Uniphase?, 11/12/99
? 5 stocks ready to join the party, 11/9/99
? 3 stock picks to go with the mo', 11/5/99
More?
Who would I pick for king of the mountain when broadband access becomes a commodity? America Online. The company has the brand name with consumers and it understands, as almost no one else on the Internet does, how to build an appealing and easy-to-use service. American Online, in fact, seems to be one of the few technology companies in the Internet sector that thinks like a consumer product company.
Five years from now when we're talking about the disruptive companies that upset the PC and Internet access apple cart around 2000, I'd be surprised if Dell and America Online weren't a big part of the discussion.
But as winners in both the current and the next stage of the technology revolution, I do think Dell and America Online are likely to be the exception rather than the rule.
Next column: The upstarts that might rule the kingdom one day.
Details
--------------------------------------------------------------------------------
Recommendations
Research Wizard
--------------------------------------------------------------------------------
Updates on Jubak's Picks Stocks
New Developments on Past Columns
Catching the Cisco express
No sign that Cisco Systems (CSCO) is slowing down. In last week's earnings report, the news wasn't earnings -- the company reported its usual penny above Wall Street expectations. That's nine straight quarters with a penny surprise. The real suspense involved revenue growth. Would the company be able to beat the 41% growth reported in the last quarter? Not to worry: Cisco reported 49% growth. And not content to rest on those numbers, the company also announced two new acquisitions. For $128 million in stock, Cisco acquired V-Bits, a maker of multiplexers for digital video, a key to combining video and data into a single stream over a cable modem. For about $800 million, Cisco bought Aironet Wireless Communications, a maker of local wireless networks. I'm raising my target price for Cisco to $93 by April 2000.
Details
--------------------------------------------------------------------------------
Recommendations
Research Wizard
10 stocks to buy on the dip
Pretty solid for a bad quarter. On Nov. 11, Dell Computer (DELL) announced earnings of 18 cents a share, exactly what Wall Street was expecting after Dell's earlier warning. (Before the warning, analysts had expected Dell to earn 20 cents a share.) Revenue grew by 41% in the quarter as the company continued to grab market share in virtually all of its markets. As expected, though, rising prices for key components and continued price cuts from competitors kept pressure on Dell's margins. Dell also noted that it continues to make progress in shifting sales onto the Internet. In the most-recent quarter, the Internet channel accounted for about 43% of sales. This stock remains a Jubak's Pick.
|
