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This Technology Sector Is Set to Make Huge Gains

By Larsen Kusick, analyst, Phase 1 Investor
Monday, July 18, 2011

Last month, tech giant Cisco produced a series of incredible numbers.
 
Cisco is the world's largest builder of Internet "plumbing"... the routers and switches that make up the Internet. The numbers concern a trend we wrote about earlier this year: the huge and growing amount of data flowing through the Internet these days.
 
As the biggest maker of networking equipment, Cisco has a good view of what the future of the online data boom looks like. It even employs a "Chief Futurist" to help guide its business.
 
Right now, Cisco is laying out the numbers for 2015 (less than four years away). By 2015:
  • Internet traffic will quadruple, reaching 966 exabytes of data per year. (An exabyte is an amount of data roughly equal to a billion medium-quality movie downloads.)
  • There will be a total of 15 billion network-connected devices in the world (two per person).
  • Internet users will reach 3 billion – roughly 40% of the global population.
  • Average broadband speeds will increase fourfold from current levels.
Those are just the basic "big picture" numbers. Cisco also confirmed the enormous trend in mobile devices... gadgets like smartphones and tablet computers. The big "gadget boom" is another trend we've highlighted for Growth Stock Wire readers. According to Cisco...
  • In 2015, traffic from wireless devices will exceed traffic from wired devices. (Today, wireless makes up just 37% of traffic.)
  • Global mobile data traffic in 2015 will be 26 times higher than 2010.
These enormous growth rates are happening because of two factors. First, the entire world is becoming connected. Nearly a billion people in China and India will be using the Internet. Meanwhile, the fastest growth is in Latin America, where traffic is expected to increase at an annual rate of 50% over the next four years.
 
The second big factor is video. Unlike the average Microsoft Word document, videos are huge files. Internet video is currently about 40% of online traffic. That percentage will rise to more than 60% by 2015.
 
Dave Evans, Cisco's "Chief Futurist," summed up the explosion in traffic by noting that it took 200 years to fill the U.S. Library of Congress. He pointed out that Internet users now create the equivalent amount of digital data every two minutes.
 
The most interesting part of this megatrend is the smaller niches that connectivity is creeping into. For example, a small Dutch company called Sparked is helping farmers keep track of their cows' health by attaching sensors to their ears. This connects to a wireless network. It sounds crazy, but Sparked has generated major interest from farmers. By having their cattle wired, farmers can monitor them to detect diseases or pregnancy.
 
That's right... in the future, even cows will be generating wireless data.
 
For investors, there are dozens of tech companies in position to profit from this big trend. The safest way to profit is by owning cheap, dividend-paying tech giants like Intel and Cisco. Intel makes the processors and other parts that go into PCs and mobile devices, as well as the big servers that help manage internet traffic. Cisco is involved in multiple areas of the networking space... making the switches, routers and other equipment involved in sending information across the world.
 
As you can see from the table below, these companies are still bargains...
 
Company
Market Cap
Forward P/E
Price/Sales
Expected Earnings
Growth
Intel (INTC)
$118 billion
9.3
2.6
6.2%
Cisco (CSCO)
$85 billion
9.0
2.0
7.2%
 
While Intel and Cisco are cheap, investors aren't likely to score a double- or a triple-double digit gain on either name any time soon. These companies are already so big, it's difficult for them to grow earnings higher than single digits.
 
Fortunately, small-cap names in the networking equipment sector have sold off in recent months. After rocketing during the second half of 2010, investors have run from these names as near-term growth rates haven't lived up to the early hype.
 
This isn't a surprise. Small-cap technology stocks are notoriously volatile based on the "boom or bust" nature of the business. Companies with a market cap under $10 billion could quadruple in a couple years... or they could get chopped in half if a competitor's technology becomes the industry standard.
 
Below is a list of direct plays on the data boom. None offer the bargain-basement valuations of the giants. However, these names all have the potential to double during the second half of 2011, especially after the recent selloff...
 
Company
Market Cap
Forward
P/E
Price/Sales
Expected Earnings Growth
Juniper (JNPR)
$16 billion
16.2
3.9
23%
F5 Networks (FFIV)
$9 billion
25.2
8.9
21%
Riverbed (RVBD)
$6 billion
33.0
10.2
32%
Acme Packet (APKT)
$4 billion
43.5
17.3
35%
Ciena (CIEN)
$1.5 billion
17.9
1.0
*
Finisar (FNSR)
$1.5 billion
11.7
1.7
59%
* Ciena's earnings are expected to be negative for 2011, so earnings growth can't be calculated.
 
Keep in mind... these are all high-risk, "boom or bust" names. In fact, I've mentioned F5 before, after the stock dropped more than 20% in one day back in January.
 
Shares of Finisar tripled from September 2010 to March of this year. Since then, the stock is down more than 60%.
 
Cisco's latest outlook confirms the big data boom is intact. And as you can see, there are both conservative and aggressive ways to play it.
 
Good trading,
 
Larsen Kusick




Further Reading:

Jeff Clark recently told Growth Stock Wire readers that Cisco "has never traded at a valuation this cheap. Somehow, I suspect, it won't stay this way for long." Get his take on the bargain-bin tech giant here: This Dominating Blue-Chip Company Has Never Been Cheaper.

In The Daily Crux
Market Notes
Shale gas trend continues to grow... BHP Billiton buys Eagle Ford shale developer Petrohawk for $12 billion.
 
Petrohawk deal sends more than one dozen oil and gas names to fresh highs, including Range Resources and Southwestern Energy.
 
Google surges 12% on Friday on news its advertising business is expanding beyond online search.
 
Huge gold fund GLD jumps 7% over the past two weeks.
Market Watch
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Change
52-Wk
S&P 500 1316.14 +0.6% +20.0%
Oil (USO) 38.13 +1.5% +10.3%
Gold (GLD) 155.20 +0.4% +31.3%
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World ETFs
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Change
52-Wk
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S. Africa (EZA) 70.70 +1.0% +27.3%
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Japan (EWJ) 10.66 +0.8% +12.9%
India (IFN) 30.07 +0.7% +7.3%
China (FXI) 41.33 +0.3% +5.8%

Sector ETFs
Symbol Price
Change
52-Wk
Oil Service (OIH) 153.66 +3.0% +49.9%
Internet (HHH) 78.28 +0.9% +46.1%
Basic Mat (IYM) 79.62 +1.3% +41.1%
Retail (PMR) 21.52 -0.4% +33.7%
Consumer Svcs (IYC) 73.12 +0.1% +29.7%
Industrials (IYJ) 68.78 +0.0% +29.2%
Telecom (IYZ) 24.50 +0.1% +28.6%
Real Estate (IYR) 61.19 +1.1% +28.4%
Big Tech (QQQQ) 57.85 +1.3% +27.9%
Transportation (IYT) 96.51 -0.1% +27.2%
Biotech (PBE) 22.29 -0.3% +26.4%
Media (PBS) 14.93 +0.4% +25.0%
Water (PHO) 19.39 +1.2% +24.4%
Health Care (IYH) 73.38 -0.5% +23.5%
Software (PSJ) 26.20 -0.1% +22.1%
Big Pharma (PPH) 70.94 -0.4% +20.4%
Construction (PKB) 13.03 +0.5% +19.3%
Semis (PSI) 15.72 +0.3% +18.9%
Defense (PPA) 19.66 -0.7% +18.1%
Utilities (XLU) 33.36 +0.2% +15.2%
Insurance (PIC) 16.03 -1.7% +12.1%
Financials (IYF) 54.95 -0.1% +5.2%
Nanotech (PXN) 8.50 -0.2% -1.7%
Alt. Energy (PBW) 8.55 +0.7% -4.9%

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