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Wolfe: Building a Nanotech Portfolio
08/15/2003 12:00 am EST
Josh Wolfeis a leading expert in nanotechnology, an emerging market in which matter is manipulated at a molecular level. Among his many credentials in the sector, Wolfe is a founding advisory board member of a nanobio venture from Northwestern University, with the first All-Nobel Prize advisory committee. Here, he outlines the prospects for the industry and some top stock picks.
"The easiest way to define nanotech is the ability to place individual molecules where you want, when you want, with the functionality you want. We now see a reversion to atoms–physical matter and manipulating things precisely the way you want to create new devices and technology. The nanotech field ranges from quantum dots–an entirely new type of physics that will impact areas such as optical communications and bio-labeling–to waterproof fiber already used in khakis sold at stores like the Gap and Levi’s.
"Is this market becoming the next bubble like the Internet? We don’t think so, due to some fundamental drivers. The first trend is government funding. This year alone we’ve had $2.4 billion allocated from the US government and an equal amount internationally. So we now have about $5 billion being funded for nanotechnology. The other reason that we don’t think this is like the Internet bubble is the intellectual property barriers. In the Internet, there really weren’t many barriers to entry, as anyone with a server and a router could begin selling on the Internet. With nanotech, you’re talking a decade's worth of research that then becomes patents, which are licensed to companies doing real work and creating products. We firmly believe that the time is now to start taking positions and building a very diverse portfolio.
"One of the first companies we see as a long term buy is Veeco Instruments (VECO NASDAQ). The fundamentals are there. This is a company, which has really started to embrace nanotech. and that’s growing. It has about a 70% market share on the atomic force microscope market. Nano is now about 40% of their business and that segment of their business is actually growing at a 67% rate over the past two years. Much of the government and corporate money that is flowing into the nanotech sector is going towards this type of equipment. The company has $220 million in cash and a 35% debt-to-equity ratio.
"FEI (FEIC NASDAQ) is another long-term play. FEI and Veeco were in fact expected to merge, but it didn’t go through because of Department of Justice concerns. Meanwhile, the fundamentals are very sound. The company makes ion beams–also a tool that allows you to work at the nanoscale. Keep in mind, when we’re talking nanoscale, we talking about something 75,000 times smaller than a single human hair. We’re talking about individual atoms and molecules. Many of the capabilities in this field did not exist three or four years ago. But these companies are producing the tools to allow us to do that.
"Pharmacopeia (PCOP NASDAQ) is a long-term buy. This is another company that is in the tools segment--although not in the capital equipment area. Rather, these are the folks that are making modeling and simulation software. This means that you are using a computer to actually model out the action between atoms at a nanoscale level. This allow you to see a product before you spend the money to produce it. While the company was initially focused on life science and drug delivery, they are now shifting a lot of their business into new material discovery.
"NVE Corp. (NVEC NASDAQ), or Non-Volatile Electronics Corp., is the one we are most excited about. The company owns all the patents in the field of spintronics (which uses electron spin rather than electron charge to transmit information) and non-volatile magnetic memory (MRAM). This technology provides a fundamental technology that people need and want; for example, MRAM lets you instantaneously flip on your computer in the same way as you turn on your TV, without waiting to boot up. It has a dominant intellectual property position, $7.5 million cash on the books, and a $75 million market cap. It is just marginally profitable today, but we expect to see tremendous licensing fees come in; other companies such as IBM, Infineon, Cypress Semiconductor, Motorola, etc. need to license from NVE, which has the fortress of intellectual property rights for MRAM."
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