The Fourth Wave for Technology
01/24/2003 12:00 am EST
"Science does not know its debt to imagination," said Ralph Waldo Emerson. Despite the ever-present wall of worry, and the ups and downs of tech stocks, we should not lose sight of the incredible advances and future potential of science and technology. From nanotechnology to space exploration, high tech advances are only limited, as Emerson saw, to the imagination of our scientific community. Here Michael Murphy discusses the coming Fourth Wave of high tech promise.
Few advisors are as prolific as Michael Murphy, who is a noted money manager and the editor of several leading financial newsletters. He writes The California Technology Stock Letter, Health Investing, Biotech Investing, and Technology Investing . While many focus on today’s concerns, he turns his eye towards tomorrow’s promise. Here, he provides an overview of the "waves" that have comprised the technology sector over the past three decades, and his belief that the Fourth Wave of technological advance has just begun.
"We all know that tech stocks have been in a nasty bear market, but what many investors don’t realize is that technological research and innovation are continuing at an unprecedented pace. We believe we are now entering the Fourth Wave. We measure these waves by looking at semiconductor sales. The First Wave, driven by mainframe computers, saw semiconductor sales peak at about $5 billion in 1974. In the down cycle after mainframes peaked, no one knew what, if anything, would drive the next up cycle. Guess what? Tons of research and innovation produced the PC, and semiconductor sales took off in a new up cycle, reaching $26 billion. The PC cycle topped out in 1984. Again, in the down cycle after PCs peaked, no one knew what would drive the next up cycle, and many figured there wouldn’t even be a next cycle. Wrong. Research and innovation continued, giving us networking and the Internet, which kicked off an even more dramatic up cycle that peaked in 2000 at $204 billion in chip sales. That’s about 8X the second peak, and 40X the first peak! Once again, the cycle lasted longer and went much higher than the previous one.
"We are now finishing another down cycle after the Internet and networking peak, so where do we go from here? The graph above clearly shows each move up increasing in size and duration. A conservative estimate based on the first three waves is that the next up cycle should be at least 5X the Internet peak—that’s $1 trillion dollars in chip sales. And guess what—once again, no one knows what will drive the next up cycle. There are a lot of candidates; the hydrogen economy, nanotechnology, and MEMS (microelectronic mechanical systems) all have their adherents. I think the next up cycle will be driven by worldwide seamless connectivity, expanding the Internet, wireline, wireless, cable and satellite systems to connect virtually everyone on earth to the knowledge, work, and other people they need to lead rich, meaningful lives. That’s a tremendous undertaking that will fulfill the promise of the New Economy while creating a much bigger, more stable boom than the 1990s.
"I’m talking about much more than just an extension of the connectivity we see today. Let me give you a couple of examples. Imagine being on a family adventure safari in Africa. You pull out your Qualcomm-based Nokia cell phone and snap a picture of your kids on an elephant, then email it via your AOL account to a very jealous fourth-grade class back in your hometown. The teacher asks if your child could do a live Microsoft PowerPoint presentation over the Internet about the daily life of elephants, and take questions from the class. No problem. Your children have a Dell Tablet PC. Using a Motorola wireless connection to a satellite uplink, they connect to the Sun servers running their AOL accounts and search the Internet, pulling together info and pictures.
"Meanwhile, your spouse uses the Motorola cell phone to access your home security system on your in-home Cisco wireless network to be sure the garbage was put out and the pet sitter remembered to leave water for the dog. The refrigerator has left a message that your milk is past its date, so she emails the house sitter. At the same time, you contact your company which is running Oracle applications on a Dell server with an Intel Itaniuim-2 processor, Microsoft Windows XP 64 operating system, and a Check Point Software firewall. And your office happens to be in your ski cabin in Sun Valley. With Corning fiber to the home and a box of JDS Uniphase components right outside the door, your home office is as well connected as if you worked in Manhattan.
"That’s what I envision. Ongoing innovation will result in another driver and another boom. The Second and Third Waves each created numerous billionaires and multimillionaires, and I believe we are beginning the Fourth Wave. Indeed, this is the basis for what I expect to be the ‘J’-shaped recovery. This is simply a ‘U’-shaped recovery but with a dramatic extension to the upside. I believe the ‘J’ recovery is now under way. The chart below shows where I think we are. As you can see, it began in 2002, and I expect momentum to slowly build in 2003, followed by much more rapid growth in 2004 and 2005."