Wolfe: the Future of Nanotech
02/28/2003 12:00 am EST
There are few superlatives that can describe the awe that anyone with a scientific bent feels after listening to Josh Wolfe present a speech or workshop. He is the editor of the Forbes/Wolfe Nanotech Report. His focus is on a breakthrough technology - the manipulation of matter at the atomic level - that many feel could represent the next technological revolution. Here, he describes the technology as well some long-term plays in the sector.
"Many people don't know what nanotechnology is. I'll give you a quick definition to help you visualize it. If you were to pluck one of the hairs from your head, a single strand of hair, and you were to split that 75,000 times, the unit that you would have left would be about a nanometer. We're talking about a ridiculously small size scale. We're talking about a quarter of the size of a virus, which is very, very, very small. We're talking about single atoms and molecules. And the reason why this is important is because we've never before had the ability to control or manipulate things at the atomic level. The goal of nanotechnology is to manipulate matter at the atomic scale. To take individual atoms and build them up to do useful things. And some of those useful things range from medicine, new drug applications, and new ways of delivering drugs. On the other end of the spectrum, we have electronic applications in the semiconductor industry and the automotive industry. We have the material sector, such as things that can make windows and surfaces harder and stronger and stain or scratch resistant. If you want to think how nanotechnology is going to affect you, the US government has said that in the next ten years, this will be a one-trillion-dollar industry. That's tremendous. People are equating this to the next industrial revolution. We've developed a lot of trends and strategies that you can capitalize on, particularly in places where all this government money is flowing, and who are the early beneficiaries.
"We come at the markets from a fairly unique perspective, as we have a very niche focus. Nanotechnology is at the very early leg of a curve here, a curve that is growing at an exponential rate. That's ultimately going to increase the attention that the field is getting. Some people consider this science fiction. We strongly disagree. Nanotechnology as a sector is the second largest funded technology by government since the space race. Governments around the world are are allocating huge budget to this market. We are looking for stocks with good fundamentals, good growth, and large margins. And we are most concerned with identifying the trends that others have not yet identified. When those trends get recognized, you'll likely see a surge in stock prices.
"I'll give you one example. Just like any other major industrial revolution or technology revolution, the people who are providing the picks and axes, the tools, make a lot of money. For example, the Internet, regardless of what happened to the dot coms, for a period, the makers of servers and routers that supplied the infrastructure to the industry made a lot of money. And right now, in nanotechnology, if I asked you to manipulate a single atom, you would look at me like I was crazy. We can't manipulate atoms; our hands are too big. But there is a company that took a technology developed by IBM, licensed it about five years ago, and has built a tool, called an atomic force microscope. And it kind of works like a record player. They are very sophisticated and cost about a million dollars each. Well it turns out that this company, Veeco Instruments (VECO NASDAQ) owns this market. They have about 70% market share and the demand curve for their products has been accelerating at about 50% per year. This company is providing the tools to the start-up companies and the venture capital companies and various industrial players who are looking to move and manipulate matter at that atomic scale. So we're very excited about that tool sector.
"Another company we like in this field is FEI Co. (FEIC NASDAQ), which was set to be acquired by Veeco. But because of its declining stock price and Department of Justice concerns about the firms developing a monopoly position, the deal fell through. Nevertheless, we like the fact that both companies have very high exposure to the nanotech tool sector, and that part of the business is growing at 50% annual rates, and we expect that to continue. Another way to play this trend is Pharmacopeia (PCOP NASDSAQ) which provides software to let you do visualization and modeling. If you walk into most government laboratories or university labs, what you will see is that rather than scientists mixing beakers of chemical solutions, they are now increasingly doing this work on the computer. Fundamentals are strong. The stock is trading for about the same value as cash, despite having $124 million in revenues from major clients such as Eli Lilly, P&G, Glaxo, and Novartis.
"Also as an aside, I would note that Warren Buffett just bought into a bankrupt textile company and as part of the purchase he got 51% of a small nanotechnology company. In order for a company to make money in this space, they have to have core intellectual property to protect themselves from competitors and serve as barriers to entry. That's something we didn't have in the Internet. Buffett bought a 51% stake in Burlington Industries (BNI NYSE). The company had filed for bankruptcy some time ago. But they made a very strategic investment in a company called Nanotex. What Nanotex does is they have a scientist from Berkeley who developed these little nanofibers that can be woven into fabrics. And it turns out that if you were going to take water and pour it on the material, it just beads up and drips right off. You have no stains and you're clothes never get wet. You can spill wine and mustard and anything else on it and it drips right off. They've now gotten this nanotechnology-based product into Eddie Bauer, Lee khakis, Dockers, and they are going to continue to develop these markets."
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