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New leaders of the communications revolution evolve
| Editor’s note: Jeffrey B. Osher authors my article this month. Mr. Osher is a senior at Miami University in Oxford, Ohio, where he maintains a GPA of 3.5 and is a member of the Dean’s List. Mr. Osher worked as an intern in my office during the summer where he researched high technology trends and the emerging industry participants. Mr. Osher analyzed my data monitors for divergent stock patterns. During that time, he developed a proprietary stock valuation model that over the summer showed returns of 35%. His article was submitted to my firm on Aug. 3. Fred L. Dowd |
Imagine if you had the insight to in vest in Cisco Systems in 1990 at a split-adjusted 16 cents per share, America Online in 1992 at 25 cents per share, or Dell Computer in 1998 at 10 cents per share. Your respective returns would be 43,600%, 66,100% and 41,250%. These three household names developed products and technology that revolutionized the way we access data, create data and send and receive data. They were pioneers whose innovations supplied an enormous demand. We believe that the communications age is in the incipient stages of another great revolution.
The Commerce Department’s statistics make it very clear that our economic growth has been driven by technology. Since 1995, an estimated 35% of gross domestic product has come from this industry. As the new communications era evolves, the companies who can supply a product or technology to bridge the current age with the new will have the same returns as those companies we wish we had owned before they became Wall Street darlings. Those investors who can combine keen stock picking with an understanding of the revolution’s direction, and those companies that stand to benefit from it, will be rewarded with staggering returns.
The Internet
It is clear that the medium for the communications revolution will center on the Internet. However, the companies that may end up the biggest winners are not the household names like Yahoo! and Amazon.com. They are the companies that revolutionize the way we communicate by means of the Internet. Currently, the majority of Internet users are simply surfing the World Wide Web. However, it has become clear that the Internet will become a medium for much more than browsing.
Broadband is a type of data transmission that allows voice, video and digital data to travel together at high speeds. While this emerging technology can be utilized by way of cable modems, existing copper phone lines, radio waves or fiber optics, it still has several price and deployment issues facing widespread use. The present baseband transmission used by more than 99% of Internet users is simply too slow and cannot transmit the quantity or quality of data that is desired by Internet users. In our opinion, broadband will become the universally accepted transmission, much like the rise of the compact disc over the tape cassette in the late eighties.
As most will remember, everyone owned a Walkman with a tape player in their car as well as in their home stereo. Music stores began supplying an expensive alternative, the compact disc (CD). CD quality far exceeded that of the cassette, but those who bought CDs were those who understood or needed the advanced technology that CDs offered.
As CD growth expanded in niche markets, its popularity and recognized superiority over tapes began to inundate the mainstream. As they became cheaper and better understood, CD sales far surpassed tape cassettes, eventually comprising 98% of the audio market. The bottom line was that superior technology won, especially as advances in technology reduced prices. We believe the same model will reproduce itself with the Internet and broadband on a much greater scale.
Today, less than 1% of all Internet users are utilizing broadband transmission. But, like CDs, many industry experts recognize broadband’s superiority. The urgency of network providers to upgrade their infrastructure further supports broadband’s propitious future. There is no doubt that as broadband be comes widely available and less expensive, it will become the universal bandwidth transmission. Large corporations clearly believe this, most notably AT&T, who spent $117 billion on two acquisitions last year in hopes of establishing itself as a broadband powerhouse. The biggest mistake a prospective investor could make is to not invest in a revolutionary company be cause it is “expensive.” AOL, Dell and Cisco had high price to earnings ratios after they had run up a few hundred percent.
Market leaders
Who stands to gain from broadband acceptance? We believe the following four companies are in a position to reap incredible rewards and may see similar gains to those companies before them that have changed the way we communicate. All four companies are market leaders in different sectors.
Polycom Inc. (NASDAQ: PLCM) 8/3/99 — $32.75; 10/4/99 — $45.50. Polycom produces audio and video teleconferencing products. Polycom is a perfect fit in the communications revolution as their ViewStation paves the way for videoconferencing. This technology has a plethora of potential markets, and with broadband networks, the Internet can support seamless real-time videoconferencing. Their conferencing products can hook up to corporate Internets as well, meaning that meetings can be held with all participants at their own desks. The travel cost savings for large, multinational corporations will be phenomenal. The market for teleconferencing truly has no ceiling, as all industries can utilize this unique technology.
Polycom has a 75% share of the market, and that market share appears to be growing. As the products become cheaper, they will become more integrated into the mainstream with increased demand. With an expected 5-year growth rate of 36%, its current valuation of 27 (8/3/99) times next year’s expected earnings are a bargain with very strong upside potential.
JDS Uniphase CP (NASDAQ: JDSU) 8/3/99 — $90.44; 10/4/99 — $116. JDSU is our favorite long-term investment with the best chance of these four companies to dominate the future of broadband, which will be achieved through fiber optics. Until someone proves Einstein wrong, light travel physically has no peer in terms of speed, and sending data by means of photons is clearly faster than sending it by means of electrons. This is the premise of fiber optic networks. It centers on a process called wave division multiplexing. Lasers pump different colors of coded light, each containing data, down the same strand of fiber simultaneously. This technology delivers virtually no transmission bottlenecks.
The recent merger of Uniphase, the largest provider of the coded light (active components) and JDS Fitel, whose products are the best at interpreting the coded light (passive components), created JDSU. This merger has very little overlap in products but a tremendous overlap in customers, making them a one-stop-shop for optical networking equipment. The rule of technology seems to be that the superior concept, once it is made affordable, will become supreme. The speed of light has no challenger, and as JDSU’s broad range of superior technology suggests, they may have no challenger either.
Nokia Corp (NYSE: NOK) 8/3/99 — $83.63; 10/4/99 — $90.25. Nokia is the Finnish giant and leader in the wireless telecom industry. Nokia is the clear bellwether in wireless service, with its market share climbing to 32.4% for the first quarter. A new technology, code-division multiple access (CDMA), has arisen, which appears to be the future platform for wireless transmission. CDMA allows for wireless exchange of voice, video and data. Even though Nokia does not own the CDMA technology, their brand recognition, wide client base and quality of service will give them the edge moving into the new wireless world.
Wireless phones will become similar to the traveling PC, with the capacity to handle much more than phone conversations. In late summer, Nokia will roll out its second-generation phone. This phone will be Web-ready, able to provide stock quotes, sports scores, e-mail and many other features. Further down the road, a third-generation phone will provide Internet access from a wireless phone. This third-generation phone is expected to capture one-half of our country’s market in 10 years.
Forte Software (NASDAQ: FRTE) 8/3/99 — $13.00; 10/4/99 — $27.125. Forte has become a leader in the enterprise software industry, especially in the high-growth enterprise application integration (EAI) market. Analysts have not put growth numbers on this market because there appears to be no tangible ceiling. Forte’s top EAI product, Fusion, allows companies to link, or fuse, software programs regardless of the application on which they run. With Windows, UNIX, Linux and a handful of other operating systems, Forte may have hit the jackpot with its ability to link otherwise incompatible programs.
As the numbers of companies seeking e-business skyrockets, it has become evident that Java (Sun Microsystems) will be the language of choice. Forte’s blockbuster, SynerJ, was just recently introduced. SynerJ enables companies to create, deploy and manage enterprise applications all tailored to the customer’s specific needs.
Why is a software company one of the four top picks? SynerJ is the only next-generation Java product that goes beyond ease of development to make it easier to deploy and manage large scale Java applications. The Internet will be the medium of the new communications era, and if Java is the common language, then SynerJ could end up running laps around the software industry. Sun Microsystems has recently decided to purchase Forte.
For Your Information:
- Fred L. Dowd is a registered investment adviser and portfolio strategist with physician clients throughout the United States with offices at 104 S. Wolcott St., Ste. 740, Casper, WY 82601. He can be reached at (800) 252-3693; fax: (307) 234-3557; e-mail: fldowd@trib.com; Web site: www.fldowd.com.