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Tech's Next Cycle
05/20/2005 12:00 am EST
Alberto Vilarhas spent 37 years focused on discovering emerging tech companies and was among the first institutional investors in such names as Oracle, Intel, Cisco, and AOL. Here, he looks at some potential winners among tomorrow’s technologies.
"I remain very constructive on emerging technology. I think a key question today is whether tech is in a bull market following the horrific 2000-2002 bubble. But the truth is that emerging technology has led the stock market since the October 2002 bottom. Investors remain confused and concerned about technology largely because, in my view, they are looking at the wrong part of technology. They are looking at the legacy part of technology, the previous 15-year cycle in client server technology, instead of looking at the new cycle. Our thesis is that we are in a new cycle in technology, in which everything is going to be networked. Your business and your personal life will be run over the Internet, enabled by wireless broadband convergence. Networking over the Internet, search, networking in the home, and the integration of e-commerce represent extraordinary markets over the balance of this decade.
"To illustrate, I would note that for three decades, I was interested in what General Motors needed to automate their factories. In contrast, today I am looking at the ‘consumer’ side and seeing an extraordinary expansion of the market. Digital consumer technology markets are undergoing explosive growth. These include new technologies like 3G, VoIP, video on demand, wireless broadband, search, comparison shopping, personal customized wallets for shopping, smart phones, etc. And look at the wiring for homes. All the wiring in your house is eventually going to go in the garbage can. I think the Internet is laying the foundation for a truly scalable new cycle in network technology. What was viewed as ‘hype’ at the top of the bubble market is now becoming reality.
"Google (GOOG NASDAQ) really needs no introduction. But I would say that Internet search is still a small market, under $5 billion. Look at some markets that they can go after. Direct marketing by phone is an $85-billion market. Direct marketing by mail is $45 billion. Classified is $15 billion. Yellow Pages is $14 billion. Overall, it’s a huge opportunity and Google is growing twice as fast as any of the other large Internets. Mobile and local search opportunities are on the way. It’s entering the branded advertising business. And the amount of material that can be indexed and searched is extraordinary. People note the stock has doubled, but I'd point out that I had Cisco in the 1990s, which rose 1200 times. I think Google has a long way to go.
"Salesforce.com (CRM NYSE) is involved in sales force automation. The company really represents a paradigm change in using e-commerce, where software is a service. Basically, it is e-commerce on demand and it has a different business model. They are one of the fastest growing companies in the software space, growing at 80% a year. They are increasingly penetrating large accounts.
"Navtech (NAVH OTC BB) is involved in global positioning (GPS) software. It’s a duopoly presently of two companies that have 80% of the market. The penetration rates are very attractive. In the US, just 5% of cars have these systems. I think cars could go to 100% penetration. In Europe, they are at 40%. New markets includes rapidly growing personal navigation systems, cell phones, etc. In other words, the Internet cell phones and personal navigation could be 10. 20, or 30 times larger than the present market, which is just autos. It’s also very expensive to get into this area. They have spent $600-$700 million to establish this market, so there are very strong barriers to entry in this market.
"Cogent (COGT NASDAQ) is involved in security. This is a big area and, obviously, the homeland security people are going to be a big client. They are just scratching the surface on what is going to be able to be done with fingerprint biometrics and I think its going to see global demand, I think ultimately corporations will buy, I think people like Homeland Security will be a major client.
"Jamdat Mobile (JMDT NASDAQ) is in the wireless gaming market. It is very rapidly growing at 70% to 80% a year. The worldwide gaming market could grow at 40% to 50% for a number of years. Graphic and video capabilities of phones are rapidly increasing. 3G rollout is happening in Europe and in the US Jamdat is one of the largest players, with 20% of the market. It’s very dependent on carrier relationships. It’s not easy to get into the business. And carriers are consolidating and we think that they will stay with this company. It also has good opportunities internationally."
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