Whoa, read this article....
Read point #1 about "pipeline"! I think he is reading the thread man! :) Jubak? Is your name really Cymeed? ;)
I knew the guy loved BRCM like me.. but GBLX and MFNX now all the sudden? Hmm... (twilight zone theme music)
Great article overall..
moneycentral.msn.com
Jubak's Journal
Plotting my road map for the post-PC race
The next stage in the evolution of computer technology is under way, but how can you invest ahead
of the curve? Let's look at Sun, Cisco, Qwest and Broadcom.
By Jim Jubak
Ready for the post-PC age?
Yes, I know. You've heard this before from Oracle and Sun Microsystems. Who can forget Oracle
CEO Larry Ellison's predictions that the network computer would make the personal computer obsolete faster than you could say, "Fire up the Stanley Steamer, Mabel."
Of course, these two companies have a vested interest in convincing the world that Microsoft (MSFT), the publisher of MoneyCentral, and Intel (INTC), the two companies that dominate
PC-based computing, are headed for the scrap heap of history. And certainly as an oracle, Oracle (ORCL) needs to work on its timing: The PC was supposed to be in full retreat by now.
But it would be naïve -- and dangerous to any investor's portfolio -- to assume that the entire global voice and data network can go through revolutionary change and yet leave the PC unchanged. In the last few months, companies as different as Cisco Systems (CSCO), Hewlett-Packard (HWP) and even Intel have announced new products or adopted new strategies that lead me to believe they see change coming.
I don't think that change is going to play out in exactly the way that Sun Microsystems (SUNW) and Oracle have sketched out -- some PC hardware and software companies may even wind up becoming more profitable. But change is coming and, if I can, I'd like to be sure that my portfolio is profitably ahead of the curve. I'm not going to try to convince you that I own a crystal ball able to
reveal the exact details of the future. Instead, consider this column a road map in progress, a first
draft to a guide for investing in the next stage of the evolution of computer technology.
The Internet has changed the pipeline
It helps me to think of the current revolution in the electronic manipulation of voice and data as a
wave that, starting at the far ends of the world, has swept closer and closer to the home. The
Internet -- a useful bit of shorthand for all the changes in the voice and data network -- transformed
the long-distance pipeline, changing it from a bundle of copper wires to strands of optic fiber.
More powerful versions of older technologies and whole new technologies manage that immense
torrent of information. Switches, routers and servers make sure that traffic gets to its destination.
Gigabytes of permanent storage and ebbing and flowing temporary caches act as reservoirs to
receive and smooth the flow. The "last mile" to the home from the fiber-optic pipeline remains a
bottleneck -- but one that is gradually being forced wider by a combination of cable TV, wireless
telephony and new technologies that speed up traffic on copper wires.
The single most unsettled question -- and possibly the most interesting for investors -- is, "What
does that wire, cable or radio signal connect to in the home?"
In one view, the PC remains the center, the gateway to all outside information.
Single-purpose appliances, such as a personal date book, connect to the Internet through the
PC.
Another possibility is that the TV becomes the gateway, in fact, replacing the PC for
purposes such as surfing the Net, viewing video clips or shopping. Appliances would dock
with the TV mother ship.
The "network is the computer" vision is yet a third possibility. In this world, single-purpose
appliances connect to the network itself and the network performs the heavy computation
required by tasks such as video. Application programs such as a spreadsheet are stored on
the network, rather than in a home computer, and downloaded to some simple terminal for
local use. That box, while it might superficially look like a PC, has very little in common with
the machine now on your desktop at home. It is relatively dumb and has relatively little
storage -- since the network itself supplies computation and storage.
Pulling the pieces together
Each one of these stages -- not just the last one -- is itself a major investment theme in a post-PC
world. I've written about parts of each stage in many past columns, but I'd now like to try to pull all
the pieces together. Many of the recommendations in Jubak's Picks are built around this view of
how technology is developing.
1.The pipeline. Capacity, capacity, capacity. Build it and they will come. And because
networks built from scratch in the last few years are cheaper to run, the companies that own
these pipelines should be able to price below older carriers and still make bigger profits. My
favorite stock for this stage is Qwest Communications (QWST), a Jubak's Pick in my Oct. 2
column "4 stocks likely to thrive amid deflation." I also like two specialty pipeline companies
-- Metromedia Fiber Networks (MFNX), which specializes in building fiber networks for
business use in the cities of the Northeast, and Global Crossing (GBLX), which is building a
fiber-optic system under the Atlantic that's scheduled to go into operation this year.
2.Traffic management. Start with Cisco, another Jubak's Pick -- especially now that recent
quarters have shown that Cisco can sell to the big phone companies. (See my Nov. 17
column, "I'll take Cisco's word for it" on this trend.) Tellabs (TLAB), also a Jubak's Pick, is
my choice of a smaller company with a good shot at becoming a major player. And, of
course, Lucent Technologies (LU) will become an even more formidable competitor in this
space after it digests Ascend Communications (ASND).
3.Storage. The Internet creates a massive demand for storage. All that material from Lucy
Lawless' home page to the company financials on the U.S. Securities & Exchange
Commission's EDGAR Web site have to be stored somewhere for download. And they have
to be cached along the way, along with applications for running them, closer to the end user
to take some of the delay out of the "World Wide Wait." EMC Corp. (EMC) dominates the
mass-storage market. I also like two newcomers, Inktomi (INKT) and Network Appliance
(NTAP), that are attacking the market for temporary cache storage in the system. (Both EMC
and Inktomi are Jubak's Picks. I've written about EMC and Network Appliance in my Jan. 11
column, "Two high-tech heavyweights and the tale of the tape" and about Inktomi on Jan. 5 in
"Why Internet sales won't click without service.")
4.The last mile. I can't make a convincing case for any one industry dominating access to the
home -- and I'm less certain that the economics of the last mile are going to produce much in
the way of profits for any specific company. My favorite way to invest in this stage is actually
through the chip makers that help build these connections. My favorite here is Broadcom
(BRCM), which will sell lots of chips no matter which technology captures the last mile,
followed by Level One Communications (LEVL), both Jubak's Picks. (See my May 30
column, "The real winner of the AT&T deal on Broadcom.")
5.The home. Even thinking about this puts an investor on the cutting edge -- but we're in good
company. Cisco Systems, for example, just started a consumer products division on Jan. 7
to develop, among other products, a "personalized network" for the home, "a sort of
plug-and-play local area network," according to Cisco's press release, connecting PCs,
phones, TVs and other Internet appliances (whenever somebody actually starts to sell some).
At the moment, however, Cisco's consumer products business is not much more than Vice
President Robba Benjamin. But the products are coming: At the end of January, H-P
announced a database appliance, presumably first for the business market, but maybe for
home use someday, with Oracle. And Sun Microsystems has signed up the world -- from
Eastman Kodak (EK) to Nokia (NOK.A) to 3Com (COMS) -- as licensees for its Jini software
that will, Sun says, connect any device to a network regardless of hardware or software.
What don't investors know yet?
What operating system, if any, will dominate. Candidates include offerings from Sun,
Microsoft, 3Com, Wind River Systems (WIND) and Psion (PSIOF).
How the home will be wired for a network. Are you itching to hang wire off your ceilings or
snake it through walls?
We don't know what the "killer app" -- the appliance that everyone just has to have -- will be.
(And, yes, before you e-mail me, I do know that "killer app" originally referred to
"application.")
Actually, though, while I don't know for certain what that killer app will be, I've got a pretty good
guess: the phone. A phone that has a calendar, e-mail, address book and maybe a pager would be
pretty attractive. I think that's why Nokia is part of the group that licensed Jini -- and why in the last
year or so the company has bought two small technology companies specializing in Internet
protocol and voice over Internet. And it's why I added Nokia to Jubak's Picks recently. I think
wireless phone companies will be one of the first winners in this stage.
While I don't know
for certain what that
killer app will be,
I've got a pretty good
guess: the phone.
Who else? Well, companies that make the chips that these devices need -- here, Jubak's Pick
Texas Instruments (TXN) is a hands-down choice. The company owns about 45% of the market for
digital signal-processing chips that are a critical component in cellular phones and other
communications appliances. Another possibility is companies that make the equipment needed to
connect these appliances. The technology of choice at the moment is called fibre channel. Chip
maker QLogic (QLGC) seems well-positioned to benefit from the shift to that technology.
Intel, Dell and Sun should benefit
At least initially I think some PC makers and dominant PC chip maker Intel also will prosper. Dell
Computer (DELL), for example, is adding more high-priced servers and storage appliances to its
product mix. And the incredible profitability -- how about 90% gross margin? -- of the high-end Xeon
chips that power servers is part of the reason that Intel crushed analyst projections in the fourth
quarter of 1998.
And then there's Sun Microsystems. In the short run, Sun will sell a lot more servers. The company
already is extremely profitable and has been able to increase its operating margin in the last two
quarters to 13.5% from 10.7%. Recently, Sun told analysts that the company's goal is to cut sales,
general and administration expenses over the next three years by three percentage points.
In the long run, if the post-PC world moves in Sun's direction, is this a company ready for an Intel- or
Cisco-style breakout? It's worth thinking about. |
