Bloomberg Personal Finance Magazine's 100 Hot Stocks Annual ranking is out...
guess who's #3 just behind EMLX and BVSN....yup, GNET! It also is the very FIRST stock discussed in the accompanying article, in the first section called Internet content, highlighted as one of five stellar performers - only 5 out 100 are written about in detail.
One marvel of technology is how it's changing our lives. Another is how it
defined the fastest-rising stocks of 1999--and will again in 2000.
By John Witty, January/February 2000
Twelve months ago, in the last edition of the Bloomberg 100, we predicted that the technology sector would continue to sizzle in 1999 (check!), that e-commerce would make another leap forward (check!), that Japan and Europe were good bets (check and double check!), and that the perennially disappointing small-cap sec-tor was poised to pay off (um, we're still optimistic). Then all that heavy breathing must have fogged the crystal ball: "Exuberance is abating," we wrote of the markets. "Don't expect investor excitement to fuel monster price moves."
So much for fortune-telling. Just when we thought it was time for some rational prudence, the markets took off again, making 1999 a year without peer. By Halloween, when we tally up the figures for rankings, the technology-heavy Nasdaq composite index had reached an all-time high of 2,966, up 67 percent for the 12-month period. It closed out November at a record 3,336. Meanwhile, the Dow posted a 25 percent November-to-November gain, and by early December was near record levels.
The hypergrowth stocks of this year's Bloomberg 100 led the charge. Two years ago, in 1997, the average total return of our list's top 20 stocks was 468 percent and "sky-high" was a favorite descriptor. In 1998, the same average dropped to 266 percent, a return that was merely huge. This time around, the top 20 gained just over 800 percent. Anybody got an adjective for that?
To find returns smaller than 300 percent on the current list, you've got to scan down to No. 65, Terayon Communication Systems (TERN)(299 percent) and No. 66, America Online (AOL) (298 percent), the only stock ever to make the Bloomberg 100 three years running. But this list loves two things--growth and youth--and our latest edition shows again that innovation is driving our national economy.
Of the top 50 stocks, 48 are traded on the Nasdaq. Less than half of the 100 were publicly traded five years ago. Only eight were on the list last year. And by any measure many of these stocks are extraordinary, sporting astronomical valuations, minuscule book values, and price-to-earnings ratios that are meaningless because earnings are nil. A value investor would be aghast.
But our advice is not to be too rigid with common measures. Y2K bugs or no Y2K bugs, the technology wave rolls on, with more and more companies vying to provide better, faster, cheaper information, products, and services to a six-billion-person world. While it's wise to be skeptical of stratospheric valuations, and to be cautious when innovations can render a company here today, gone tomorrow, a closer look at new technologies can explain these stocks' intrinsic appeal--and the potential magnitude of the ongoing revolution.
So come along as we look at five stellar performers among the Bloomberg 100, each in a different technology sector. We tell you why these companies were the darlings of investors in 1999, and what the new millennium holds for them and their competitors. If you were smart enough--or lucky enough--to buy these five stocks 12 months ago, your average return would have been 781 percent. Can the market produce winners like that again in 2000? Yes, sure. Will it? You can read last year's warning again--or you can read on.
Internet Content
For anyone who's ever noticed that the World Wide Web is a confusingly vast collection of sites, Web networks have an old-fashioned answer: Go with the brand you trust. For the last four years Go2Net (GNET) has been building an all-purpose Internet stopping place. The Seattle company now offers, among other things, search services (metacrawler.com and dogpile.com), financial information and advice (siliconinvestor.com), Website hosting for about 500,000 small businesses (hypermart.net and virtualave.com), an auction site (haggle.com), and an on-line payment-authorization service with more than 43,000 customers (authorize.net).
"Picture networks as malls that bring in the traffic," says Arthur Newman, an analyst at Schroder & Co. in New York City. "Many small Website sponsors don't generate any traffic at their freestanding sites, and many never will. So they are very willing to be linked with a branded network like Go2Net or Yahoo! that has the viewers."
The strategy's working. By July, Go2Net was ranked 9th among digital media/Web properties as measured by Media Metrix, with more than 11 million unique visitors. That was up from 77th in January 1998. Go2Net's primary revenue stream is advertising, but merchant-account, site-hosting, and transaction-processing fees are growing--rapidly. Revenues have gone from less than $600,000 in 1997 to more than $22 million in 1999. Go2Net's stock split twice in 1999, and soared from an adjusted $5.50 per share to $70.06, a stunning 1,167 percent 12-month return. Watch for the company to grow its stable of properties. Russell Horowitz, CEO of Go2Net, comments, "We do three things at Go2Net every day: We eat, we breathe, we acquire. We will add depth to what we own and move into new categories." Indeed, in November the company announced a deal with Net2Phone to enable users to send and receive phone calls, faxes, and voice mail from its sites.
The Competition: Call them what you will--portals, search engines, retailers, or Web networks--their objectives are basically the same: Get lots of users clicking on their sites. Go2Net is certainly one of the leaders, as are AltaVista, Go Network, Yahoo! (YHOO), one of the original portals that offer multiple products via integrated sites, and Internet service providers like AOL. The battle to build traffic will only escalate in 2000. Excite@Home (ATHM) and Lycos (LCOS) are compiling Web networks. Amazon.com (AMZN) has gone way beyond books to become an e-partment store displaying the wares of hundreds of vendors. In the convoluted economics of the Internet, upstarts like AllAdvantage.com, GoToWorld, and Desktop Horizon are even paying people a pittance to browse their sites. For the time being, there is enough audience growth to feed all comers.
GNET projection: Consensus earnings surveyor I/B/E/S projects 53 percent growth annually over the next five years. The top line is expected to double in 2000.
Sector projection: Analysts are predicting annual earnings growth of 25 to 40 percent for the next couple of years.
Fat Pipes
One of the biggest races in technology is the "Broadband Derby," the race to provide consumers with the one wire that will support everything: hyperspeed Internet connections, telephones, television, and interactive services like video on demand. It's too early to call this contest between phone companies and cable operators, but no matter who wins, the derby is good for Harmonic (HLIT). The Sunnyvale, California, company designs, builds, and sells the guts of hybrid fiber-optic/coaxial delivery systems. For the past five years, Harmonic has integrated DWDM (dense wavelength division multiplexing) technology in its product lines. With advances and refinements, it's figuring out how to cram more and more data into the "pipe." How? By breaking white light into other colors and soaking them with signals. Wild, huh?
According to Blaine Carroll, an equity analyst at SG Cowen in Boston, "Harmonic has been well positioned to take advantage of the cable industry's need for more capacity. They were the first to market with a workable DWDM system. It has paid off, particularly with AT&T."
RCN, Cox, Charter, and Time Warner are all customers, spending wads of money to upgrade their systems. But AT&T, the industry's megaplayer, is client numero uno. Its orders could mean hundreds of millions in revenue, and last year Harmonic delivered the first multiplexing nodes AT&T has approved for its trial installations in Salt Lake City.
Harmonic's numbers reflect the headlong dynamics of the race to connect. Net sales shot to an estimated $161 million in 1999 from $74 million in 1997. The stock climbed steeply, from roughly $5.75 in November 1998, to its split-adjusted high of $79 before ending at $56.06. Still an eight-bagger!
The Competition: Everyone knows the cable industry is determined to bring broadband delivery of information--be it voice, video, or data--to American homes, and because the money being spent on infrastructure is awesome, the stakes are high. Harmonic has a 45 percent share of the digital-architecture market, according to CIBC World Markets research. It competes with ANTEC (ANTC), C-COR.net (CCBL), Scientific-Atlanta (SFA), and General Instrument (GIC), of television-set-top-box fame, which announced its merger with Motorola (MOT) just weeks before Harmonic, not to be outdone, acquired Divicom's video compression business from C-Cube Microsystems last fall. What's happening? Fiber-optics companies are looking beyond the upgrading of cable systems to wireless delivery. In September, Harmonic unveiled the Cyberstream IPG 8000, which delivers seamless integration of Internet data services with wireless systems.
HLIT projection: Securities broker CIBC World Markets expects sales of over $220 million in 2000. I/B/E/S projects 35 percent annual growth over the next five years.
Sector projection: Look for more merger and acquisition activity and more partnering, as well as very respectable earnings growth of 20 percent to 30 percent, as the Broadband Derby heads into the stretch.
Network Security
E-commerce is hot, hot, hot. And what does every e-transaction need? Security. Datamonitor, a market research firm in London, expects the global market for network-security products to triple to $8 billion by 2003. For VeriSign (VRSN), this is a charming forecast.
VeriSign provides security products and services needed by Websites, businesses, and individuals to conduct commerce and communications over computer networks. It does this by selling digital identifications, also known as digital certificates, that incorporate public key infrastructure (PKI) encryption protocols. Industry analysts believe that PKI will spread in the next few years, and VeriSign is leading the way.
In simple terms, PKI uses two keys, each a complex digital character combination, for any computer-to-computer communication. The sender uses one key, the recipient the second. Not sexy, perhaps, but oh-so-necessary as banking, drug prescriptions, and other confidential transactions become commonplace on-line. AT&T, Microsoft, and Visa, among others, use VeriSign safeguards.
So far, VeriSign dominates the market. The company has sold more than 180,000 server certificates (at $300 to $1,200 per year) and claims 90 percent market share. But Stratton Sclavos, CEO of VeriSign, believes the potential market to be 10 million units. "We are quickly approaching the time when a digital signature will carry the same legal weight as your personal signature," he observes. "We see digital receipts, digital notarizations, and certified delivery of e-mails as some of the future applications."
Spun off from another company in 1995, VeriSign has grown to a projected $83 million in sales in 1999 from $1.3 million in 1996. VeriSign issued stock in 1998 at $7 per share. In the 12 months ending November 1, it split once (a second split was announced later that month) and climbed 777 percent to close just over $131. At that price, VeriSign sports a total market value of $6.6 billion.
The Competition: Entrust Technologies (ENTU), which uses PKI technology, is a direct competitor of VeriSign. It sells security software that companies manage themselves, whereas VeriSign oversees its applications from a data center in Mountain View, California. GTE and a couple of notable foreign concerns are also embracing PKI. And other network-security companies like RSA Security (RSAS), Axent Technologies (AXNT), and Network Associates (NETA) can expect to ride the e-commerce security wave, too, into 2000 and beyond.
VRSN projection: Banc of America Securities forecasts sales of over $131 million in 2000. I/B/E/S projects 102 percent annual growth over the next five years, by far the highest projection for a Bloomberg 100 company.
Sector projection: Obviously, the fortunes of the network-security industry are tied to electronic traffic. Earnings per share for Entrust are expected to more than triple this year, to 36 cents. VeriSign's are expected to grow seven-fold to 30 cents, according to Zacks Investment Research, a New York City research firm that compiles analysts' estimates. General projections for network-security companies are strong, too, although less dramatic: 25 to 30 percent.
Wireless
Now there's a familiar name. The San Diego company's roots can be traced back to the late '60s, an aeon ago to the arrivistes of the Bloomberg 100. But there's nothing creaky about Qualcomm (QCOM), a leading developer and manufacturer of wireless communications products, a gargantuan market segment that is still growing like mad.
Key to its recent success is a wireless-transmission standard called code division multiple access. CDMA uses digital encoding and "spread spectrum" radio frequencies to provide wireless networks with clear voice communications and high-speed data transmission. The technology is used in cellular phones and handheld wireless computing devices, and it happens to be the world's fastest-growing digital technology, with an estimated 42 million users in 1999 and a projected 75 million users by December 2000.
Qualcomm capitalizes on this remarkable technology in several ways. It makes the integrated circuits that let CDMA work (it has sold more than 100 million chips). It makes many of the wireless telephones (though Qualcomm expects to sell the business). And it makes CDMA-network-infrastructure products. To top it all off, the company owns the intellectual property, so it receives a royalty for every device made that integrates CDMA. As Jackie Gleason would say, "How sweet it is!"
Qualcomm's revenue line looks like this: 1996, $814 million; 1997, $2.1 billion; 1998, $3.3 billion; and 1999, $3.9 billion. Within the 12-month period used to calculate the Bloomberg 100, you could have bought QCOM for less than $25 a share. Not anymore. After splitting in May, it closed on November 1 at $225.19, an astounding 672 percent return. And by the end of November it had screamed up another 137 points after the company announced a four-for-one split slated for early in 2000. Wow!
The Competition: Yes, Qualcomm is in a great market. But it's not in a great market alone. Motorola (MOT) is a major-league wireless-device maker and an aggressive chip manufacturer. Texas Instruments (TXN) is also a big player. Overseas, there's Philips Electronics (PHG), Nokia (NOK), Ericsson (ERICY), and Alcatel (ALA). There are competing technologies as well. GSM (global system mobile) is the standard in Europe, and even the U.S.'s biggest cellular service provider, AT&T, doesn't use CDMA--it uses TDMA (time division multiple access).
CDMA, though, is becoming more widely accepted. A 3G (third-generation) service, wideband CDMA, will be adopted as the digital standard for wireless in Japan by mid-2001 and Europe by mid-2002. "We see wireless data transmission and mobile Internet delivery as huge growth vehicles," says Richard Grannis, Qualcomm's vice president and treasurer. "You will see video coming to mobile devices and laptops connecting to networks--without wires." Already, wireless Web access is taking off. Sprint Corp. PCS (PCS) recently introduced PCS Wireless Web service, and others are hot on its heels. Experts predict that close to half of cellular phones sold in the next year will have Web-linking capabilities. Wireless this and wireless that. Get used to it, it's going to surround you.
QCOM projection: The consensus estimate on Wall Street is that the company will grow its earnings 30 to 40 percent a year for the next few years, as it reaps the benefits of its $300-million-plus annual spending on R&D.
Sector projection: The telecommunications-equipment sector includes a wide range of companies, from the very small Xeta Corporation (XETX) to giant Lucent Technologies (LU). Zacks' consensus five-year growth projection is 29 percent.
Vision Correction
When Time runs a cover story on a medical procedure, as it did in the October 11 issue, something must be up. Well, laser vision correction (LVC) is sweeping the country, and few companies are profiting more from it than Visx (VISX). The Santa Clara, California, company is the leading manufacturer of the cool-light laser systems used to correct common vision problems like nearsightedness, farsightedness, and astigmatism.
LVC has become the nation's most common surgical procedure overnight. The FDA okayed the technology only three and a half years ago. Now some 2,000 people a day undergo the minor procedure, in which a computer-controlled laser cuts out tiny portions of the cornea to reshape the eye. The procedure, which takes only a few minutes, typically costs between $2,000 and $3,000 per eye. In most cases, this is elective surgery not covered by insurance, but plenty of people have been willing to pay to see better, and, not surprisingly, the procedure is popular with doctors; about 7,000 physicians have trained to perform it.
The margins in this business are to die for: Visx enjoys a gross profit margin (sales less cost of goods sold) of over 70 percent, according to Robertson Stephens research. The company generates revenues by selling the laser systems (at around $350,000 per) and collecting license fees of about $260 for each LVC procedure. In 1999, almost a million such procedures were performed, nine times the 1996 total, yet less than 1 percent of the potential market.
The company was No. 60 on the Bloomberg 100 last year, after its revenues doubled from 1997 to 1998. Revenues doubled again in 1999, and the stock climbed again, to over $103 after a May two-for-one split. But even at its November 1 close, $60.88, if you had gotten in two years ago, your vision of dollar signs would be crystal clear.
The Competition: Visx dominates the field. In the second quarter of 1999, Robertson Stephens estimates, 78 percent of U.S. LVC procedures were done on Visx lasers. Founded in 1986, the company jealously guards its business and market share with more than 140 patents (and another 70 pending) for LVC technology. But competition is emerging. A few foreign and domestic companies are mounting challenges to Visx's patents. Massachusetts-based Summit Technology (BEAM), although somewhat smaller, is the No. 2 laser maker and is growing. A new Florida company called LaserSight (LASE) is on the radar screen, and in the wings is Bausch & Lomb (BOL), which is awaiting final FDA clearance of its own laser system.
VISX projection: The big consensus estimate compilers, Multex, Zacks, and I/B/E/S, envision a five-year annual growth rate of 28 to 35 percent.
Sector projection: According to I/B/E/S, Visx's competition can expect to see 30 to 40 percent sales growth in the next five years, as can the two main operators of LVC storefront surgery centers, TLC Laser Centers and Laser Vision Centers.
-- Additional reporting by Michelle Abrams and Allison Kopicki. John Witty is a banking consultant and former investment banker. |
