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Ten tech stocks for the next decade’s technology revolution

December 31st, 2009 · No Comments

Investing in technology stocks is a mixed blessing though..

On the one hand, growth is often rapid and business models display non-linearities more often than in other sectors, by which we mean that profits can rise disproportionally with sales (as in software or any sector in which fixed cost are disproportionally large) and/or standards play a disproportional role, offering winner-take-all opportunities (witness Microsoft, Intel, or Google).

On the other hand, developments are often so rapid that things get commoditized very soon (memory chips), obliging companies to cannibalize their own products. Success can also be a trap, making the company unaware of the threats to its business model (IBM in the 1980s offers a famous case), and threats often come from unexpected corners (that is, not existing competitors but small new innovative ones that slipped below the radar screens).

Barriers of entry can also be low, which can often negate part of the growth story (as has happened in the solar energy space). So stockpickers should be very aware of these special elements of the business models of tech stocks. We have a feeling that the author of the following article is pretty well atuned to that.

My 10 Picks for 2010’s Tech Revolution
Shlomi Cohen

When I wrote in this column a year ago, my recommendations for 2009, I claimed that despite the fact that we were on the edge of an abyss, I believed that the trend on which I based my recommendations for 2008 was still in force. That is, that we are at the beginning of a new industrial revolution which started at the onset of the 21st century, and according to Cisco (CSCO) CEO John Chambers, the trend will continue for many years.

It is a revolution that is taking place on the back of the broadband Internet infrastructure, both landline-based and wireless, and one that we have not known anything like since we first came across personal computers and mobile phones decades ago. But the current revolution is tens of times bigger than what happened then, because it is not one gadget or another, but actually a drastic change in our lifestyle.

That is also the reason that shares that broke out so fast and so far this year, despite a collapse at the beginning of the year, were shares of companies leading the revolution, led by two that I recommended: Apple (AAPL), which gained 146% this year, and Google (GOOG), which rose 101%. Of those two shares, on my short list of recommendations for 2010 I keep only Apple, because it has wide sweep of very fast growth in the world’s two largest technology sectors — telephones and computers.

As for the remainder of my portfolio, tracked by “Globes”, I continue to recommend chip supplier Marvell Technology Group (Nasdaq: MRVL), despite the fact that it has more than tripled since the low point of last year. Its operating results in the last year are near perfect, including tight cost management which brought it to a very high gross profit level. It operates in sectors with high growth, such as processors for storage, communications, and mobile devices. It is only in the beginning of entering the latter field in China.

A second large chip company I recommend is SanDisk Corporation (Nasdaq:SNDK), which was left off of last year’s list because it was on the verge of collapse. As is known, there were firms in its field that collapsed, like Spansion which bought Saifun Semiconductors Ltd. and is now bankrupt.

Over the past year, SanDisk underwent an internal organizational revolution, a business revolution in terms of its partner Toshiba (TOSBF.PK), and what is more important, the revolution in the flash memory field: higher demand at the same time as a rise in prices, a rare occurrence in this industry.

I continue to recommend SanDisk, because its complex business model chip producer, intellectual property seller – which brings in large royalties, and seller of processors for data storage – a field which is growing very fast – is set to bring the company to a high level of profit in the next two years, which will justify a doubled stock price.

Among smaller firms in the chip market, I recommend Mellanox Technologies Ltd. (Nasdaq:MLNX) and EZchip (EZCH).

Among smaller firms in the telecommunications equipment market, I continue to recommend Ceragon Networks Ltd. (Nasdaq: CRNT) and Orckit Communications Ltd. (Nasdaq: ORCT). Ceragon had a strong ending in the last quarter of the year. It occurred partly because of CNBC’s Jim Cramer, but primarily because the visibility in its field improved a lot, and in my opinion we will hear about it in the financial results it releases in January.

Loading up cellular networks by transferring video and other data through smartphones, led by the iPhone, leads the cellular companies to invest more in widening their network. Ceragon has among the best solutions available, and succeeds in grabbing large contracts, specifically in the US. The company is also very successful in third world countries, such as India, where its penetration of the cellular communications market is less than half as advanced as in developed countries.

For Orckit, it was a paradoxical year- the number of customers grew and sales nearly disappeared. Among its wins this past year were BSNL in India, a new customer in Mexico, a recent win in Scandinavia in which Orckit reportedly beat Ericsson (ERIC), which somewhat owns the Scandinavian telecommunications market. There was also a win in Germany and an IPTV deal in Korea.

With a large and high-quality base of customers, and if 2010 in the telecommunications sector will be as many expect it be, a year of renewed investment, then Orckit will offer a pleasant surprise for the first time after four dry years.

I also recommend Orbotech Ltd. (Nasdaq: ORBK) in the telecommunications equipment sector. With the world emerging from recession, the firm’s less dazzling market, printed circuit board inspection, will return to growth. The company’s sexier market, inspection equipment for LCD screens, will grow next year — but will get a boost to a faster pace in 2011, when the many factories expected to open in China will move into the stage of setting up their equipment.

Two large Orbotech customers, Korean firms Samsung and LG, recently received government authorization to invest in LCD lines in China, and that follows investments that will arrive from customers in Taiwan and Japan.

Japan’s Sharp (SHCAY.PK), the largest screen producer, showed analysts around its new production line last week. The line, on which it will produce giant screens, is the world’s most advanced of its type, and among the impressive things was the inspection process going on, using Orbotech equipment.

I recently recommended Camtek Ltd. (Nasdaq: CAMT), a small competitor of Orbotech’s. Despite the share’s jump since then, I still think it is attractive for 2010, because of its potential in inspecting chips in areas where Orbotech doesn’t operate.

In the software field, I again recommend ClickSoftware Technologies Ltd. (Nasdaq: CKSW) and IncrediMail Ltd. (Nasdaq:MAIL). IncrediMail has been generating large profits ever since signing a revenue-sharing deal with Google, and both ClickSoftware and IncrediMail grew during the crisis.

The last recommendation is biotech firm Protalix Biotherapeutics Inc. (AMEX:PLX). It turns out that after signing a deal with Pfizer (PFE), short sellers jumped all over the share, and attacked it to an extent that short interest rose from 3.8 million shares to 6.8 million shares. That drove the price down from $10 per share to $7 per share, with no clear reason why.

Today, with a valuation of around $550 million, a drug that apparently will be approved within several months, a marketing agreement with one of the biggest drug companies in the world, and a pipeline of drugs in development based on the unique platform it developed, it seems to me that Protalix is one of the more attractive investments in the field today.

When I wrote in this column a year ago, my recommendations for 2009, I claimed that despite the fact that we were on the edge of an abyss, I believed that the trend on which I based my recommendations for 2008 was still in force. That is, that we are at the beginning of a new industrial revolution which started at the onset of the 21st century, and according to Cisco (CSCO) CEO John Chambers, the trend will continue for many years.

It is a revolution that is taking place on the back of the broadband Internet infrastructure, both landline-based and wireless, and one that we have not known anything like since we first came across personal computers and mobile phones decades ago. But the current revolution is tens of times bigger than what happened then, because it is not one gadget or another, but actually a drastic change in our lifestyle.

That is also the reason that shares that broke out so fast and so far this year, despite a collapse at the beginning of the year, were shares of companies leading the revolution, led by two that I recommended: Apple (AAPL), which gained 146% this year, and Google (GOOG), which rose 101%. Of those two shares, on my short list of recommendations for 2010 I keep only Apple, because it has wide sweep of very fast growth in the world’s two largest technology sectors — telephones and computers.

As for the remainder of my portfolio, tracked by “Globes”, I continue to recommend chip supplier Marvell Technology Group (Nasdaq: MRVL), despite the fact that it has more than tripled since the low point of last year. Its operating results in the last year are near perfect, including tight cost management which brought it to a very high gross profit level. It operates in sectors with high growth, such as processors for storage, communications, and mobile devices. It is only in the beginning of entering the latter field in China.

A second large chip company I recommend is SanDisk Corporation (Nasdaq:SNDK), which was left off of last year’s list because it was on the verge of collapse. As is known, there were firms in its field that collapsed, like Spansion which bought Saifun Semiconductors Ltd. and is now bankrupt.

Over the past year, SanDisk underwent an internal organizational revolution, a business revolution in terms of its partner Toshiba (TOSBF.PK), and what is more important, the revolution in the flash memory field: higher demand at the same time as a rise in prices, a rare occurrence in this industry.

I continue to recommend SanDisk, because its complex business model chip producer, intellectual property seller – which brings in large royalties, and seller of processors for data storage – a field which is growing very fast – is set to bring the company to a high level of profit in the next two years, which will justify a doubled stock price.

Among smaller firms in the chip market, I recommend Mellanox Technologies Ltd. (Nasdaq:MLNX) and EZchip (EZCH).

Among smaller firms in the telecommunications equipment market, I continue to recommend Ceragon Networks Ltd. (Nasdaq: CRNT) and Orckit Communications Ltd. (Nasdaq: ORCT). Ceragon had a strong ending in the last quarter of the year. It occurred partly because of CNBC’s Jim Cramer, but primarily because the visibility in its field improved a lot, and in my opinion we will hear about it in the financial results it releases in January.

Loading up cellular networks by transferring video and other data through smartphones, led by the iPhone, leads the cellular companies to invest more in widening their network. Ceragon has among the best solutions available, and succeeds in grabbing large contracts, specifically in the US. The company is also very successful in third world countries, such as India, where its penetration of the cellular communications market is less than half as advanced as in developed countries.

For Orckit, it was a paradoxical year- the number of customers grew and sales nearly disappeared. Among its wins this past year were BSNL in India, a new customer in Mexico, a recent win in Scandinavia in which Orckit reportedly beat Ericsson (ERIC), which somewhat owns the Scandinavian telecommunications market. There was also a win in Germany and an IPTV deal in Korea.

With a large and high-quality base of customers, and if 2010 in the telecommunications sector will be as many expect it be, a year of renewed investment, then Orckit will offer a pleasant surprise for the first time after four dry years.

I also recommend Orbotech Ltd. (Nasdaq: ORBK) in the telecommunications equipment sector. With the world emerging from recession, the firm’s less dazzling market, printed circuit board inspection, will return to growth. The company’s sexier market, inspection equipment for LCD screens, will grow next year — but will get a boost to a faster pace in 2011, when the many factories expected to open in China will move into the stage of setting up their equipment.

Two large Orbotech customers, Korean firms Samsung and LG, recently received government authorization to invest in LCD lines in China, and that follows investments that will arrive from customers in Taiwan and Japan.

Japan’s Sharp (SHCAY.PK), the largest screen producer, showed analysts around its new production line last week. The line, on which it will produce giant screens, is the world’s most advanced of its type, and among the impressive things was the inspection process going on, using Orbotech equipment.

I recently recommended Camtek Ltd. (Nasdaq: CAMT), a small competitor of Orbotech’s. Despite the share’s jump since then, I still think it is attractive for 2010, because of its potential in inspecting chips in areas where Orbotech doesn’t operate.

In the software field, I again recommend ClickSoftware Technologies Ltd. (Nasdaq: CKSW) and IncrediMail Ltd. (Nasdaq:MAIL). IncrediMail has been generating large profits ever since signing a revenue-sharing deal with Google, and both ClickSoftware and IncrediMail grew during the crisis.

The last recommendation is biotech firm Protalix Biotherapeutics Inc. (AMEX:PLX). It turns out that after signing a deal with Pfizer (PFE), short sellers jumped all over the share, and attacked it to an extent that short interest rose from 3.8 million shares to 6.8 million shares. That drove the price down from $10 per share to $7 per share, with no clear reason why.

Today, with a valuation of around $550 million, a drug that apparently will be approved within several months, a marketing agreement with one of the biggest drug companies in the world, and a pipeline of drugs in development based on the unique platform it developed, it seems to me that Protalix is one of the more attractive investments in the field today.

Tags: Economics of stock analysis · Technology · The Markets