Mike Murphy: Tech Talk
08/27/2004 12:00 am EST
Michael Murphy leaves no doubt as to his bullishness on the tech sector. He says,"Business in technology is great and getting better. With his expectations for a "blockbuster December quarter," the tech expert highlights some of his favorite opportunities.
"The research gurus are all raising their forecasts across the board for shipments of all kinds of products from PCs to semiconductor to wireless equipment, and even optical fiber. There are orders and backlogs virtually everywhere. Some companies are now starting to talk about what we feel will be a blockbuster December quarter. Business is terrific. Three months ago, the semiconductor industry forecast 38% growth for the year, which is a great year. Now, three months later, they are forecasting 65%. In just 90 days, they’ve increased their forecast by a huge increment. At the same time, the stocks have come down. I don’t think we can have this type of divergence go on for too long before analyst will begin to turn positive. We have a lot of opportunities at the moment in technology investing. There are so many cheap stocks that have been knocked down sharply, even though their industries are growing 20%-40% a year and they’re # 1 or #2 in the business. Here are some favorites:
"Harmonics (HLIT NASDAQ) is a supplier of video processing gear to the satellite companies, to the cable companies, and to the telephone companies. In other words, they are the ‘arms merchant’ in the big convergence race of voice and data. This is what all customers want— one source for everything. Harmonic is an 18% grower, selling near its lows. They are going to have a great December quarter. We’re buying under $7 for a $12 target by year-end, and higher next year.
"Lexar Media (LEXR NASDAQ) has been one of our worst performing stock recommendations, but we still feel that it will turn out to be one of our best. This stock is now just over $5 a share and I think you can buy it blindly at that price. We have a $15 target for the end of this year. It seems ridiculous to talk about a stock tripling. But these guys are growing revenues at 100% a year now. Long term it’s a 30% grower. They supply the digital film for digital cameras, and their products are simply better than their competitors. Professionals all use Lexar and they just cut a deal to be the exclusive supplier of Kodak-branded film. Lexar is in 55,000 storefronts now, but Kodak is in 300,000 storefronts. This is going to make a big difference.
"Packeteer (PKTR NASDAQ) is a 23% grower that we would buy up to $10 for an $18 target. The company looks inside ever packet of data that is going across the Internet. If it is data, it compresses it. If it is video or voice, it leaves it alone. So if you are going to do Voice over Internet Protocol (VoIP), you are going to buy the Packeteer equipment, because you don’t want the voice to be compressed. And, since they happen to be looking inside ‘packets’ already, they can also look for viruses and worms. While they don’t yet talk about that as an application for their equipment, they have already started selling gear in that area.
"UTStarcom (UTSI NASDAQ) does 80% of its business in China. They sell a wireless phone system. It’s not a cell phone, but works more like a citywide cordless phone. It doesn’t make a lot of sense in the US because we travel a lot. That’s why they don’t sell them here. But it makes a heck of a lot of sense in Shanghai, where a lot of people don’t have a lot of money and don’t often leave the city. It costs 20% of a cell phone. They have 54 million users in China already and they are just going into India. It’s an extremely popular way to get phone service in a less-developed country.
"Many stocks in Taiwan are depressed due to temporary political problems. Taiwan Semiconductor (TSM NYSE) is one of the best chip manufacturers in the world. It’s trading under $7 and I would buy it all the way up to $10.50. Earnings are just exploding. Right now, the company is running at 100% of capacity and is raising prices. That is all going to fall to the bottom line.
"I also recommend Texas Instruments (TXN NYSE). It’s around $20 we would buy it up to $24 for a $35 target. Texas Instruments has managed to get themselves into a beautiful position with the digital consumer in a number of different areas. They are one of the biggest suppliers to Nokia who is their biggest customer in the cell phone area. Also in DSL, they own the best company in that business, and they made investments in production facilities early. They are writing them off very rapidly so their depreciation is actually going to start falling and we will see more income hitting the bottom line.
"Veritas (VRTS NASDAQ) is the leading independent maker of storage backup and recovery software. We would buy the stock up to $20 for a $30 target. Companies are going to be spending a whole lot of money in the December quarter, and storage is right at the top of everybody’s list. Companies have learned that one guy carrying a suitcase bomb can put them out of business overnight. It is a matter of corporate life and death to have this kind of software."