(IDT/NTOP) Managers Search for the Tech Stars of Tomorrow
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TheStreet.com
Monday June 7, 7:05 am ET
By Gregg Greenberg, TheStreet.com Staff Reporter
As the sun sets on graduation season, we asked leading technology fund portfolio managers to look ahead to what might be the most important graduating class in a decade: the tech class of 2005.
Why forecast next year's crop of leaders with seven months to go in the current calendar year? Well, if you are asking that kind of question, then you need a brief history lesson.
Traditionally, there has been a 10-year interval between the introduction of paradigm-shifting technology companies and it so happens that years ending in the numeral five have been especially ripe for the creation of tech leaders.
In 1975, Bill Gates and Paul Allen started down the road to riches by founding Microsoft (NasdaqNM:MSFT - News), while Steve Jobs and Stephen Wozniak planted the seeds for Apple (NasdaqNM:AAPL - News) in Jobs' parents garage. In 1985, entrepreneur Steve Case founded America Online, the company that merged with media giant Time Warner (NYSE:TWX - News) a scant 16 years later.
And in 1995, graduate students David Filo and Jerry Yang had the smarts to leave campus long enough to incorporate Yahoo! (NasdaqNM:YHOO - News). That was also the year Pierre Omidyar launched AuctionWeb, a small auction site that snowballed into Internet mammoth eBay (NasdaqNM:EBAY - News).
With these names in mind, TheStreet.com surveyed managers of technology-based mutual funds in an attempt to discover what sectors would yield the next set of tech titans. The fund managers were also asked to vote for a few companies they viewed as most likely to succeed in 2005.
Calling All Computers
Steven Tuen, portfolio manager of the Kinetics Internet Emerging Growth Fund, said voice over Internet protocol (known as VoIP) will be the focus in the technology world in 2005 as Internet phone service starts challenging traditional delivery systems. VoIP, also called IP telephony, is a technology for transmitting voice, such as ordinary telephone calls, over packet-switched data networks.
"VoIP will put pressure on telephone companies' local and long-distance services," says Tuen. "The competitive landscape will change for the benefit of the consumer."
Tuen says a number of companies will be vying to win the VoIP sweepstakes but the two he says that are worth watching are IDT (NYSE:IDT - News) and Vonage Holding Corporation, a privately held company.
IDT is well known as a leader in the calling card business, but its Net2Phone (NasdaqNM:NTOP - News) subsidiary provides VoIP services to individuals, businesses and telephone carriers worldwide.
Vonage does not trade publicly, but that's not a problem for Wayne Collette and Trent Nevills, portfolio managers at the Columbia Technology Fund. They say the better way to play the burgeoning VoIP trend, as well as the "mobility" trend, is to invest in chip and chip design companies that supply companies like Vonage, Apple and XM Satellite (NasdaqNM:XMSR - News).
"It's hard to choose between monolithic companies like Sony (NYSE:SNE - News) and Apple, which make end products like iPods that enhance mobility," says Nevills. "It's better to start earlier in the chain."
The pair project semiconductor chip developer Silicon Laboratories (NasdaqNM:SLAB - News) and chip provider Marvell Technology (NasdaqNM:MRVL - News) as most likely to succeed in the class of 2005.
Playing the China Card
Ryan Jacob, manager of the Jacob Internet Fund, says China is the place for growth next year, even though a lot of analysts think its economy would be better if it slowed down a bit.
"There's a broad opportunity as China's middle class emerges," says Jacob. "Leisure travel and computer use will continue to increase. And China already has the second-largest number of Internet users after the U.S."
Jacob says Chinese Internet and travel stocks like Sina (NasdaqNM:SINA - News), Sohu.com (NasdaqNM:SOHU - News) and Ctrip.com (NasdaqNM:CTRP - News) have risks, as evidenced by their recent pullbacks, but calls them "near-term risks."
David Walker, manager at Van Kampen Technology Fund, doesn't want to stop at China. He also sees a budding middle class in India, Latin America and other parts of Asia clamoring for new technologies in 2005.
Looking to the Class of 2005Technology funds and how they've fared
Fund/Index Ticker YTD % Annual Returns % Expense Ratio %
2003 2002 2001
Jacob Internet JAMFX 9.9 101.3 -13.0 -56.4 2.1
Buffalo Science & Technology BUFTX 8.3 62.7 -39.0 - 1.2
SunAmerica Focused Technology STNAX 6.8 80.7 -43.5 -55.9 1.9
TA IDEX Great Companies Tech IGTAX 1.3 48.8 -39.4 -34.4 1.6
Columbia Technology CTCAX -.86 84.2 - - 1.9
Van Kampen Technology VTFAX -1.4 55.8 -49.0 -64.5 2.9
Kinetics Internet Emerging Growth WWWEX -2.8 33.6 -24.7 16.5 2.7
S&P 500 -- 1.1 28.2 -21.5 -11.8 --
Source: Morningstar (annual returns through 6/3/04)
That's why Walker expects a breakout year for Qualcomm (NasdaqNM:QCOM - News), whose code division multiple access, or CDMA, technology is powering their wireless products worldwide.
"As wireless technologies emerge on CDMA, every carrier will have to pay royalties to Qualcomm," says Walker. "And they have great lawyers protecting their patents."
Computer Warfare
The year 2005 marks the 30th anniversary of the founding of Microsoft. Back in 1975, most people never imagined that there would be a computer on every desktop. Now it's tough to imagine a world without Microsoft.
Van Kampen's Walker says the Linux 'mega-trend' will gain enough steam next year to finally put some pressure on the juggernaut that Gates built. Linux, like other open-source software, is developed by programmers worldwide who regularly share the changes they make in it.
"If you get developers to program in Linux for the desktop, then this could take share from Microsoft, which currently has a lock on it," says Walker, who declined to name a company in the sector.
Andy Sheridan, analyst at the SunAmerica Focused Technology Fund, also sees a battle on the desktop in 2005 or, more precisely, a battle inside the desktop between viruses and the Internet security programs designed to stamp them out.
"Internet security will continue to evolve in response to more sophisticated computer viruses," says Sheridan. "Judging by the Blaster and Sasser viruses, the level of attack has gotten more violent."
Sheridan's pick to fight the war against computer worms is network security provider Symantec (NasdaqNM:SYMC - News), a company that he predicts will continue to grow by acquisition.
Two Trends to Think About
Jim Huguet, portfolio manager for the TA IDEX Great Companies-Technology Fund, reminds us that technology is not limited to computers and telephones.
Huguet says the breakout technologies in 2005 will be in the medical device and biotech fields as medicine tries to keep up with an aging population. (For more of baby boomer stocks, click here.)
He expects implantable device manufacturers like Medtronic (NYSE:MDT - News) to lead the way as more baby boomers' original parts wear out.
"We are big believers that helping people live longer will be the major opportunity going forward," says Huguet.
A final trend that might be your friend in 2005 is radio frequency identification (also known as RFID), a technology similar in theory to bar code identification but with applications that increase supply chain efficiency.
Dave Carlson, manager at Buffalo Science & Technology Fund, says Wal-Mart (NYSE:WMT - News) has already mandated that its top 100 suppliers utilize RFID technology by January 2005 and he expects other retailers to follow.
Carlson says industry leaders Zebra Technologies (NasdaqNM:ZBRA - News), Unova Inc. (NYSE:UNA - News) and Sensormatic, which is now a division of Tyco International (NYSE:TYC - News), will be the ones to check out as you are checking out.
There you have it. The tech class of 2005. Now we'll just have to see which ones show up at the 10-year reunion in 2015! |
