...and the "Price" for Tech
10/15/2004 12:00 am EST
Walter Priceis senior analyst and portfolio manager at RCM Capital Management. He launched the PIMCO RCM Global Technology Fund in 1995, which recorded the best five-year record of any mutual fund in 2001, 2002, and 2003. Here are his top tech picks.
"After the very good year for tech last year, we have been in a period of consolidation for expectations and valuations. I think we are about through that process, and I look for a couple of good years for technology in 2005 and 2006. The reason I'm optimistic is that if you look at capital spending net of depreciation, we are at a 50-year low. In other words, companies have rebuilt their balance sheets by cutting capital spending dramatically, and I think we are at the point in the economy where they have to spend now for productivity improvements. So we think you will see continuing investment as long as the economy is not in a recession.
"I think tech will be one of the areas that will grow faster than other parts of the economy for the next couple of years. The drivers for technology are Internet monetization. The Internet, in my view is the growth engine for technology for the next decade and I think we are still at the early stages of that monetization. And the transformation in the communications industry—to a more data-centric infrastructure— is just beginning. Whether that is land lines going to voice over IP or wireless data, and wireless services that you can bring to the consumer and the business through technology, that’s a once in every 20-year transformation, and we are just in the early stages of that.
"I think my favorite pick in communications is Ericsson (ERICY NASDAQ). This is a company that is the leader in wireless network infrastructure. This is a company that has 50% of its business outside of the developed countries. What is happening with wireless—with the new technology of CDMA or W-CDMA— many countries are effectively going right to wireless for their telecom infrastructure. Many countries in Asia and Africa and the former Soviet Union are big customers of Ericsson. In the developed world, there is a transformation of the networks to data-centric networks from voice-centric networks and again Ericcson has leading market share in the 3G technology associated with CDMA. They have about a 40% market share, so as this transformation happens, they will get their share of this business.
"Yahoo (YHOO NASDAQ) is kind of the poster child for Internet advertising and as Internet ad dollars catch up with the usage of media by Internet users, you have this convergence— 2% of ad dollars are spent on Internet and about 15% of people’s time is spend on Internet usage. So I look for steady, high growth of 20% to 30% industry growth for the next five years, so it’s a nice tailwind for Yahoo. They have a good scheme of banner advertising, brand advertising, and search advertising.
"Marvel (MRV NYSE) is one of the more exciting semiconductor companies in Silicon Valley. It’s quietly emerged with its high growth rate and high margins as the place to work in Silicon Valley. This company is a leader in communications chips and system-on-a-chip that use communications. So if people want to transform the consumer electronics products so that they have wireless connectivity, for example they are the supplier to the new Sony portable game player that is about to be introduced. Sony wanted wireless connectivity and they came to Marvel, because they have the lowest power and they also have processing capability in that product."