Jublak is playing with the same theme that I have been looking at of displays. The price is falling into the $200 range where consumers demand will start to kick in. Consumer overall account for 30 percent of monitor sales over all, but to date most FP LCD sales have been to business. That means a big ramp is coming. Given the LCD screens are easier on your eyes, there is a practical reason for the switch.
I noticed that DVD players have finally made it into the sub-250 dollar range, so DVD should be the electronic toy of choice this Christmas.
"24-Oct-01
16:31 ET ESS Tech (ESST) 14.55 +1.83: Reports Q3 (Sep) earnings of $0.18 per share, $0.03 better than the Multex consensus of $0.15; revenues fell 17.5% year/year to $72.4 mln vs the $70.7 mln consensus
25-Oct-01 10:05 ET
ESST
Brokerage Firm Action Reiterated Rating Target
Needham & Co Reiterated Buy $17
25-Oct-01 13:00 -- 14:00 ET
ESS Tech (ESST) 13.18 -1.37: -- Before Open -- AG Edwards upgrades to BUY from Hold to ride the wave of the adoption of DVD players into the household; notes that not only is the DVD experiencing the fastest adoption rate of any major consumer electronic device, it is expanding beyond a stand-alone home entertainment systems and into portable DVD players, laptop computers and automobile and navigation applications
"
I don't know this company, but it is a play on the theme.
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Jubak's Journal
6 stocks at work on tech's 'next big thing'
Skeptics are all out of ideas for where the next big push in tech earnings will come from. I see potential for stocks in an area I'll call 'display' -- here are 6 companies to watch.
By Jim Jubak
So where’s the next big thing?
That’s the question investors skeptical of even the current crushed valuations of technology stocks have been asking for the last six months. Sure, technology stocks might have been worth 40 times earnings per share for some periods in the past, they agree, but that’s when revolutionary new technologies such as the PC, the wireless phone and the Internet were showing rapidly accelerating growth. Those technologies are mature now, the argument goes, and without the next big thing, growth rates for technology companies aren’t going to be anywhere near high enough to justify current prices, let alone a return to the sky-high multiples of the past. See Jim Jubak
Wednesdays on CNBC's
Business Center.
I think this is an extremely important argument and question for all investors -- not just those with portfolios overweighted in technology shares. And it’s especially important for long-term retirement portfolios.
Your answer will determine the way you allocate your investments in the equity portion of your portfolio. If earnings growth in the technology sector is likely to resume at something near past peaks, then the best way to recover from this bear market is to invest in the sector, despite the volatility and the risk. If technology earnings growth is likely to be much more modest, then sectors such as health care, energy and the financials with more certain growth look relatively more attractive and deserve a larger share of your resources.
And your answer will determine how you pick stocks inside the technology sector itself. If you see a catalyst that will set off another period of above-average earnings growth for the sector, picking aggressively makes sense. Strong earnings growth across the sector would provide downside protection, and the stock market environment would favor momentum plays. If you think earnings growth rates will be lower -- to reflect maturing technology markets -- then buying the 600-pound gorillas of the sector is a better strategy. Those companies will wind up with an inordinate share of the total growth pie. So even if growth is slower across the technology sector, growth at the gorilla would remain relatively high.
So which is it going to be? Let’s take a look at the overall argument and one potential candidate for “the next big thing” in the technology sector.
Defining the next big thing
“Next big things” in technology tend to get labeled with the name of one dominant device or product -- hence the “next big things” that we call PCs, wireless, and the Internet. But it’s important to understand the difference between a “new product introduction” like that of the DVD and a “next big thing.” A “next big thing” isn’t necessarily a monolith. Often, it tends to be a web of technologies and products that feed on each other, forcing important changes on multiple fronts.
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The Internet, which isn’t really so much a thing as a network of mutually enabling technologies, is a classic example of this definition. I’d argue that the power of any “next big thing” is directly related to the size of the technology and product web it creates. So, for example, the Internet is likely to be a very long-lasting and powerful “next big thing” -- even though it doesn’t look like it at the moment from the performance of dot-com stocks -- because so many technologies participate in creating the Internet. The power of the wireless phone “next big thing,” on the other hand, could prove to be relatively limited unless the next generation of wireless phones successfully draws in other technologies.
Don't count 'mature' techs out
The growth of any “next big thing” in technology is usually said to resemble a hockey stick. First, you see a long period of slow growth as companies build markets for a technology-dependent product. Then, if there’s widespread customer adoption, sales climb rapidly off the flat blade of the stick, into the curve of the handle, and then straight up the handle as sales and profits head for the sky.
You can see what happens to a technology company that follows this curve by looking back at Nokia’s (NOK, news, msgs) numbers over the last six years. In 1995, when wireless phones were a relative novelty in the United States, Nokia’s sales came to $8.4 billion. By 1998, sales had climbed to $15.6 billion. And in 2000, the level rose to $27 billion.
But as fast as the sales growth was, the increase in Nokia’s return on equity was even faster. In 1995, the company earned a return of 12.7% on equity. By 1998, that return on equity had climbed to 33%, and in 2000 it came to better than 36%. As wireless phones went from novelty to necessity, Nokia’s return on equity tripled.
Now, many would argue, the wireless-phone market has matured with sales growth heavily dependent not on first-time purchasers, but on customers’ willingness to replace their existing phones. And certainly the near-term evidence supports that view: Nokia, which started the year predicting industry sales of better than 500 million phones, recently cut its estimate for 2001 to 390 million. Sales in 2002 don’t look much higher -- Merrill Lynch recently projected industrywide sales of 410 million handsets in 2002. That would amount to roughly 5% unit growth.
According to Merrill Lynch, Nokia can therefore expect a slight but steady decline in profitability in its wireless-handset business over the next couple of years. Margins in that business, which were 20% in the September quarter of 2000, will fall to 18% in 2002 and to 17% in 2003. Earnings per share, projected by the Wall Street consensus at 65 cents in 2001 and 71 cent a share in 2002, will climb to just 79 cents in 2003. That’s roughly 10% earnings growth in 2002 and 2003. According to Merrill Lynch’s numbers, Nokia at $22 a share is trading at 28 times projected 2003 earnings per share. Hard to argue that a 10% grower is undervalued at a 28 forward multiple.
Skeptics make the same argument across segment after segment of the technology sector. PC growth is certainly mature, they believe, so Intel (INTC, news, msgs) and Dell Computer (DELL, news, msgs) at 42 times and 33 times projected 2002 earnings per share are overvalued. (In Dell’s case, that’s actually 33 times projected earnings for the fiscal year that ends in January 2003.) The Internet is mature as well, the argument continues, so Cisco Systems (CSCO, news, msgs) at 43 times projected July 2003 earnings per share is equally overpriced.
But a convincing argument can be made in favor of each of these individual technology stocks, as well. Thanks to its manufacturing and marketing skills, Nokia will be able to take market share from competitors even in a slow-growth environment. The extraordinarily low levels of inventory in Dell’s manufacturing system gives the company lasting pricing power over its competitors and will let it make higher profits while component prices fall. Projections for Intel’s earnings per share fail to fully include a recovery by the communications chip segment of Intel’s business that has contributed nothing but losses to the company’s bottom line in 2001. And no one knows what Cisco’s earnings per share really can be if the company starts to use its incredible market share to generate earnings, as CEO John Chambers has promised, instead of additional dollars of revenue, whatever the cost of those revenues.
But making those arguments for these individual stocks really does nothing to refute the basic argument of those who say that technology stocks as a whole are overvalued, absent “the next big thing.” Buying technology gorillas like these is, in fact, exactly what an investor would want to do if the technology sector as a whole was going to experience a bout of slow growth. To make an argument for the technology sector as a whole at current valuations, you have to come up with at least some potential “next big things.”
In search of the 'next big thing'
One possibility for finding “the next big thing” is to look at developments that might give new youth to mature technologies. The prime example of this is in the wireless business, where optimists are counting on new third-generation (3G) equipment and the new services it makes possible to revive handset demand. (Optimists are also looking for the same kind of boost, but of a lesser magnitude, from the 2.5-generation equipment that will bridge the transition from current gear to true 3G networks.) Nokia, for example, is expected to introduce new phones with camera capabilities, multimedia messaging and wireless Java software wrapped around a color screen at the end of November.
I laid out my disagreement with this optimistic scenario for wireless in a July 27, 2001 column, “Beware the wireless time bomb.” Suffice it to say here that I think the ramp for 3G phones is a lot longer than many investors think. I don't think cash-strapped wireless service providers are going to provide a full set of new services -- and invest in the infrastructure to provide them -- until they see that there’s enough demand to make the investment pay off relatively quickly. And of course they won’t be able to see evidence that the new services are profitable until they make the investments. I think we’re looking at 2003 before we have any inkling of what the true rate of adoption is and what level of return on invested capital the wireless service providers can expect from the new gear.
The second option is to look for a completely new “next big thing.” This would be a technology, still in the early stages of adoption, that promises to create massive new consumer or business demand and that is now poised to accelerate up the hockey stick.
I do have a candidate. I haven’t seen anyone give this piece of the technology sector a single label so I’m going to have to coin one. I call it “display.”
Now, “display” isn’t a single technology and, in fact, the technologies involved range from software to hardware. But all these technologies focus on a single compelling need in the marketplace for better ways to display the words, pictures and moving images produced by current electronics.
For example, the “display” element is the oldest technology in existing PCs. The old bulky cathode ray tube that is probably at the heart of the computer monitor that sits on your desk is a relic from the invention of the television more than 70 years ago. Only in the last year have monitors based on other technologies started to show up in appreciable numbers on desktops.
But the new generation of computer monitors is only part of a trend in electronics display that I would argue includes digital cameras and digital video recorders (and their viewfinders); the next generation of 3-D graphics chips and components for video games, PCs and workstations; digital projection of movies to replace film in theatres and even the newest generation of visual interfaces for TV itself. It also includes networking and translation products that enable a user to shift a display from one device or medium to another, such as the recently announced PrintMe network initiative from Electronics for Imaging (EFII, news, msgs), Adobe Systems (ADBE, news, msgs), Xerox (XRX, news, msgs) and Yahoo! (YHOO, news, msgs). It would enable users to print personal documents from any nearby printer without the need for extra software drivers or hardware connectors.
Some companies to include in a “display” portfolio would be:
Gemstar-TV Guide International (GMST, news, msgs), on the strength of its on-screen system for programming a TV or VCR and its ownership of TV Guide and its program schedule content.
Nvidia (NVDA, news, msgs), on its leadership position in the market for 3-D graphics chips and boards.
Electronics for Imaging, on its position as the de facto standard for controllers and servers that link copiers and laser printers to computer networks.
Adobe Systems, on its ownership of the Acrobat Reader standard for the digital presentation of printed documents independent of any specific device.
ARM Holdings (ARMHY, news, msgs), on its emerging role as a de facto hardware standard for use in digital imaging, mass storage, video games, printers and personal digital assistants (PDAs).
Genesis Microchip (GNSS, news, msgs), on its leading market share in the flat-panel display market. (The company has 47% of the market for display controller chips, for example, according to DisplaySearch.)
I know “display” is a real trend in the technology market and I have no hesitation calling it “the next thing.” I don’t know, however, if it is a big enough engine to power valuations in the entire technology sector higher by itself. I doubt that it matches up in strength to the three “big things” -- PCs, wireless phones and the Internet -- that have powered past technology markets. But we’re early in this trend. Other technology movers may join in to power the sector and lift all boats.
Jubak's Archive
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Recent Jubak articles:
• 5 stocks ready to roar out of recession, 10/23/01
• 3 ways to invest in a sub-10% world, 10/19/01
• Rebuild a blue-chip portfolio on the cheap, 10/16/01
More…
And if not, the display stocks individually have growth stories that could make them attractive investments even in a weak market. Genesis Microchip revenues grew by 140% in the September quarter, for instance. Not bad for any company in a technology recession.
New developments on past columns
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Time for a little discipline
Do you believe? LSI Logic (LSI, news, msgs) announced a pro forma loss of 29 cents a share on Oct. 23 -- that was 2 cents a share better than Wall Street had projected. But the big news was the company’s optimism for the December quarter. LSI believes that it’s seen the bottom for this cycle and that revenue for the December period will be at worst flat with the September numbers and at best 5% higher. It’s hard to tell how much of that improvement is the normal seasonal surge in business in the fourth quarter. It’s especially important to factor that in for LSI Logic since the strength in the company’s business came in its consumer electronics segment, where sales of chips for Sony PlayStations and for DVD players and cable TV set-top boxes in the quarter came in above those for the June period. That growth in the consumer segment is especially striking given the company’s overall 15% sequential decline in revenue. And with lead times on orders down to just five weeks, LSI’s relatively optimistic forecast for the December quarter relies on the company landing short term orders in the quarter to make up about 50% of sales. But LSI has made substantial progress in restructuring its business -- from a shift toward consumer products in its revenue mix to the acquisition of C-Cube, a leader in the DVD market. LSI Logic typically strongly outperforms the market in the first quarter or two after the turn in its business, so I think it’s well worth holding on here, but given the uncertainty on the timing of that turn, as of Oct. 26, I’m not going to change my target price of $20 by April 2002. (Full disclosure: I own shares of LSI Logic.) |
