Investing in New Technology
Investing in New Technology:
Semiconductors -
Bringing Power to Apple’s iPhone
A Taipan Publishing Group Strategy Report
by Ann Sosnowski, Editor, Safe Haven Investor
For the second year in a row, Time magazine has named a tech innovation the Best Invention of the Year.
In 2006, the medal went to YouTube, the video viewing Web site that Google Inc. (GOOG:Nasdaq) paid $1.65 billion in stock to acquire.
That’s right: In this day and age, a simple Web video site can beat out some of the most amazing inventions man has conceived, including a cervical cancer vaccine and a portable device that can literally make water from thin air.
Go figure.
This year, an Internet tech innovation took the prize again. Time magazine officially announced that Apple Inc.’s (AAPL:Nasdaq) new iPhone device is the Best Invention of the Year.
And to continue our technology coverage over the past few months, this new opportunity is poised to ride Apple’s wave: a memory-chip company in the U.S., and though its products are small, its profit potential is substantial.
The reasoning behind Apple’s sustaining popularity is simple: This new tech boom is in the hands of consumers, not governments and corporations test-driving innovation.
The iPhone was chosen because of its sleek look, its multi-touch functionality, its ability to put handheld computing into the hands of the masses and its consistent innovation in the past, present and future.
Not to mention that the iPhone spurs competition, which of course, spurs innovation. And that’s the name of the game in this tech boom. That’s why we will not see a bubble bust like in the past.
Investing in New Technology: Apple Appeals to the Masses
Time’s choice of the Apple iPhone as the best invention of 2007 is just the next in a long line of successes for the tech heavyweight this year. Most recently, Apple announced fourth-quarter earnings and, most importantly, earnings after its first full quarter of iPhone sales.
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Minutes after being asked to appear on CNBC to talk about the anticipation of Apple’s fourth-quarter earnings report — sadly, your faithful editor didn’t have quite enough time to make it through hair and makeup, let alone be miked up for the show — the company announced a jump in profits of 67%!
Apple sold 1.12 million units, bringing the total to 1.39 million since its release in late June. Additionally, its Mac computers continued to see strong numbers, shipping 2.16 million units, a gain of 34%.
IPod sales were up 17%, totaling 10.2 million units sold. Total earnings for the company were $904 million, or $1.01 per share, well over the 62 cents per share it posted this time last year. Revenue was $6.22 billion.
Expectations were (get this) a measly 86 cents per share.
Apple’s stock, valued at a little more than $174 per share, jumped a whopping $12 after its earnings announcement, more than 7% of its value!
Even better were the annual results: $3.5 billion earned for the fiscal year and yearly sales of $24 billion, 16% of its market cap of $151.63 billion.
As for that $12 jump, I’m pretty sure that came from Apple’s outlook. The company expects earnings growth of 50% every year for the next three years — and that’s based solely on its iPhone sales projections and nothing else!
Amazing, for us and for our future profit projections, when you consider our recent model portfolio recommendations.
Investing in New Technology: Bagging the Superniche Tech Companies
Over the next few years I’m following what I like to call “superniche” companies in the tech industry. I am a strong believer that a new tech boom is just gearing up, with leaders like Apple, International Business Machines (IBM:NYSE) and Cisco Systems Inc. (CSCO:Nasdaq) at the helm. They are the companies to watch… but not to invest in.
While we hold CSCO and IBM in the current Diligent Investor portfolio, I would in no way suggest buying them now. We’re showing gains of about 50% and 31%, respectively, but I don’t see that kind of growth continuing cyclically for them at such high prices. (Of course, not as high as Apple: It currently has a P/E of 44.48, more than twice as high as Hewlett-Packard Co. (HPQ:NYSE) or Microsoft Inc. (MSFT:Nasdaq).
This is why we’re shadowing Apple in our most recent “superniche” stock recommendations. And while Apple is a good investment for safe investors, let’s not lose sight of the fact that those small tech companies, notably the semiconductor manufacturers, are the ones fueling Apple’s success.
But before I get into this “superniche” tech opportunity, I want to allay your fears about what I consider the next tech boom. In no way would I put any of you in a situation where you get burned by another tech bust. I would never offer the suggestion to invest in new start-up, dot-com companies that don’t have any sense of establishment.
Investing in New Technology: This Isn’t a Party Like It’s 1999
I’m here to assure you that the current tech boom is not going to be detrimental to your portfolio. Here at Diligent Investor, I’m doing all I can to guide you to some of the most important recommendations of the upcoming tech boom.
As you notice, I’m saying boom — not bubble. The first tech bubble was exactly that: overspeculation in a “new” industry. But now that the groundwork, the infrastructure as it were, has been set, there are some extremely profitable opportunities for you.
Major trends go through three phases: the bubble period, the inevitable bust and the sustaining period, which is the longest and most productive.
Take, for example, the railroad industry. In the early 19th century, tons of railroad companies were created, soaring in valuation, only to come crashing down. But that didn’t mean railroads became a lost industry. The original expansionary bubble created hundreds of thousands of tracks that led to growth from the Atlantic to the Pacific coasts of America. And we still use railroads today to transport some of our most important commodities around the country.
Think of it this way: The tech bubble in the early 21st century happened for a purpose. Some blank-check companies cashed in on a general trend, oftentimes without viable technology, to be sure. But it also delivered on what it promised: a groundwork that spawned creativity, innovation and broadband and wireless Internet infrastructure. Without it we wouldn’t be as connected as we are today.
Without the tech bubble, you couldn’t e-mail your coworkers and get responses back in almost an instant; you couldn’t listen to music while commuting on the train via your MP3 player; you couldn’t take instant pictures of your family at a get-together and print them out or send them to friends immediately.
All of this technology is thanks to the innovation that venture capitalists recognized by investing in what seemed possible… and even things that years ago we could never possibly conceive of.
And these days, it provides countless opportunities to profit: 1,413% to be exact on our triumvirate of semiconductor investments.
Investing in New Technology: Semiconductors Add Power to Industry
Today, countless companies are making obscene amounts money on the innovation that spawned the current tech boom. Instead of making a mockery of themselves by going public, start-up companies with viable patented and unique technology are being eaten up through acquisition activity.
Instead of instant IPOs crashing to the ground in the tech sector, we have tech giants integrating their proprietary technology. The revenues and the innovation these companies bring to the table are being recycled back into the market, instead of disappearing into thin air.
You don’t have to look far to notice it. Cisco Systems Inc. (CSCO:Nasdaq), one of our core holdings, has acquired more than 122 companies in its lifetime (many private) and doesn’t look to slow down.
And International Business Machines (IBM:NYSE) has acquired over 60 companies in just five years. Luckily, Diligent Investor has been on the tech train for some time, so far showing gains of 57% and 41%, respectively, on both of these companies.
There’s no denying that the major impetus powering the current tech boom is semiconductors. They’ve become denser, smaller and more efficient for the applications that consumers demand. It’s people (not governments and corporations) that are fueling the tech boom, buying up 1 billion cellphones a year and countless MP3 players (like the iPod) and digital cameras, just to name a few mobile devices!
The future is, quite literally, in our hands through wireless applications, software and devices. And the only way to make them work is through semiconductors.
We already have a holding in STMicroelectronics (STM:NYSE), the maker of the most important part of the Apple iPhone and its newest iPod Touch: the chip that makes it possible to automatically change screen orientation from portrait to landscape.
It also happens to make the MEMS application that allows the Nintendo Wii to react to the movement of a user and the orientation of the controller in that user’s hands.
Our second semiconductor holding that we added last month here at Diligent Investor was Skyworks Solutions Inc. (SWKS:Nasdaq), which makes the power amplifier for the Apple iPhone, the exact device Apple expects to see 50% earnings growth from into 2010.
I’m happy to say that both of these semiconductor solution companies are up in our portfolio — 4% and 2%, respectively. Cumulatively, we expect to make gains of 513% in the next two years on these vital semiconductor companies that are going to be the nuts and bolts of the new tech boom.
And they offer superniche technology to the manufacturers and marketers of the most identifiable handheld devices on the market.
Investing in New Technology: The Hottest Semiconductor Segment
The most common memory found in computers and computing devices, like cellphones and mobile music players is DRAM, also known as dynamic random access memory. In fact, DRAM accounts for almost 30% of the total semiconductor market.
On top of the DRAM market that Micron caters to, it also makes NAND flash memory products. This is the kind of mass storage memory necessary for keeping photos on digital cameras when turned off, songs on iPods when turned off, and phone numbers in your cellphone.
The NAND flash memory market continues to grow because of its ability to be written over consistently, which makes it perfect for storing more and more information on smaller and smaller computers. In fact, NAND may very well replace bulky hard drives in coming years.
This is where Apple comes in, and another big player: Intel Corp. (INTC:Nasdaq).
Apple, specifically, needs as much NAND as it can get to power its extremely successful iPods, and now, its iPhone. After all, Steve Jobs was quoted as saying that the company wants “to be able to produce as many of our wildly popular iPods as the market demands.”
Apple needed to find a way to make sure its supply of NAND memory would not run out. Money talks, as we all know, so Apple put $500 million down on the table to fund a joint venture to produce NAND flash memory in excess. In total, Apple has committed $1.25 billion to manufacturing of NAND memory to keep its iPods flying off shelves.
Why is Apple so dead set on making sure it has a steady chain of the NAND commodity? Because years ago the company actually ran out of processors for its Mac G4 computers as they were in high demand and low supply. Apple ended up losing revenue and selling half of the computers it expected.
They’re going to make sure that won’t happen again — especially in the current market environment.
NAND memory and the devices that use it are in extremely high demand. When the Semiconductor Industry Association reported that global September microchip sales rose 5.9% driven by DRAM and flash memory in small hand-held devices, it also happened to mention that NAND memory increased revenues by 58.5% for semiconductor companies.
That’s a huge increase and looks to continue. Apple itself was rumored to ask for 400 to 500 million extra NAND chips ahead of its iPhone debut for manufacturing purposes. You could say Apple is the market and is driving the market!
Which is why investing in opportunities like the companies contracting with Apple is the best idea in the tech market today. I discuss it in full detail in the current issue of Diligent Investor. Learn more about this opportunity, including how you could profit from these “superniche” tech companies.
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Originally published December 21 , 2007.
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