Tech: Today and Tomorrow
10/15/2004 12:00 am EST
"Tech stocks go up, tech stocks go down. But technology only goes forward," says technology expert Michael Murphy. Here, he offers a fascinating look at the long-term potential for technology as well as some short-term opportunities for traders.
"I think we are about to see a real serious long-term explosion in technology, which will be driven by two major forces. The first is universal connectivity. That’s happening right now. What that means is everybody wants to be connected to everybody else or to whatever data they want, at any time, from anywhere. The other is the convergence of voice, video and data, all coming at you over the same wire and all under the Internet protocol. People want all of those to come to them through one source, from one buyer who gives them one bill. But to get from here to there, a huge amount of equipment has to be sold and installed at the edge of the network. The cable companies already own video and are about halfway to becoming digital. They will have to add data and voice. The telephone companies, if they want to compete, have to offer video, which comes from DSL now and will eventually come from fiber optics.
"Yes, the accelerating recovery paused over the summer. But it now looks at if semiconductor sales will set a new high above 2000 and suggest a new long, strong upswing in technology. The last tech move was primarily in the US and a little bit in Europe. But the current upswing is worldwide. They are spending money in Asia, Africa, Latin America, and America. Last time, it was mostly businesses connecting to the Internet. This time it’s a lot of consumer products and people connecting wirelessly from everywhere. The fourth wave is underway and there will be dramatic changes in the way we work, play, and connect. I call it the fourth wave, as there were three prior waves— the mainframe era, which peaked at about $5 billion in semiconductor sales; the PC era, which peaked at $26 billion; and the Internet era, which peaked at $202 billion. In the fourth wave, over the next ten to 15 years, we could get to $1 trillion in semiconductor sales. If we come back here to a Money Show in ten years, the average $1,000 multimedia PC will be roughly as smart as a human. I have no idea what the software will be like, but I know it will be amazing and there will be a lot of new companies taking advantage of that environment.
"Looking out over next year, I’d caution that 2005 will be the first year of a presidential term. Presidents take their recessions early in their terms, so that later in the term, when the economy is expanding, their party can run for office again. Meanwhile, on the short term, I am very bullish. We are going to have a very strong December quarter. About 40% of all PCs are sold in the December quarter and a high percentage of consumer electronics are sold during the holidays. And this year, we have tax breaks for capital equipment spending that expire on December 31. There is going to be a lot of stuff sold in the December quarter. And we are just coming out of the weak September quarter, people are worried, and the stocks are down. So I think we will get a very strong rally. Here are some of my current favorite ideas:
"Taiwan Semiconductors (TSM NYSE) is a leading manufacturer of semiconductors. Most companies can’t afford to build a fabrication facility to build their own chips. They have to have someone build chips for them and Taiwan Semiconductor is the largest foundry. They have extremely advanced equipment. They are able to handle all the copper circuits that are in these connectivity chips. The stock is extremely depressed, partly because it’s a Taiwanese company and partly because semiconductors are all very depressed. Texas Instruments (TXN NYSE) is an incredibly well positioned company for almost everything that is going on in the digital consumer and RFID, DSL, and also supplying Nokia for cell phones. It’s a buy under $24 and it could go up 50% over the next year. Both Taiwan Semi and Texas Instruments are incredibly cheap right now.
"Another connectivity play is Lexar Media (LEXR NASDAQ), which seems to finally have its act together in digital film. They are the technology leader in digital film and now have the rights for the next five years to produce Kodak-branded digital film. The stock got creamed earlier this year, but it’s now moving back up rather sharply. Our buy limit is $8 and we hope to pick it up on a dip. Digital cameras will see 70% or 80% growth this year. Digital camcorders are big in Asia now, and of course, these small films can also be used in USB or flash drives in a number of small devices— such as cell phones with cameras.
"Harmonics (HLIT NASDAQ) is a convergence play. It is the leading company in handling video streams over the Internet. There is a war going on between the cable companies, telephone companies, satellite companies, to all provide voice, video and data over one wire with one bill. Harmonics essentially sells the ‘arms’ to this war. Revenues will be up about 30% this year. Wall Street thinks revenues will rise about 18% next year, but I think next year and the following year will be another 30% up year. In the case of this stock, I don’t think it matters who is the President or what happens in the economy, because this company will benefit from big capital spending projects involved in this war between cable and local telecom providers.
"Also in convergence, we like Packeteer (PKTR NASDAQ). The company is involved in Voice over Internet Protocol, where a huge amount of bandwidth is needed. What Packeteer does is to look inside every packet. If it’s a data packet, they compress it a lot. If it’s a video packet, they compress it a little. And if it’s a voice packet, they don’t compress it at all. This maintains the quality of service. Also, because they look inside these packets, if there is a virus or a worm, they can stop it. So in addition to VoIP, this company has an extra play in the Internet security area.
"Veritas (VRTS NASDAQ) is a software company that does backup and storage software. One of the biggest lessons from 9-11 was that if you don’t have all of your systems backed up offsite, ready to go, you can literally be out of business overnight. A number of companies that were in the World Trade Center have never been able to reopen their doors. Although information technology spending is slowing from the more rapid pace we saw earlier this year, I think it is slowing to a sustainable growth rate. And right at the top of most IT managers' spending plans is storage backup and recovery."