- Money Morning Australia

The Hunt for the Next Tech Stock Superstars


Written on 23 July 2013 by Kris Sayce

The Hunt for the Next Tech Stock Superstars

When do you know the stock market has bottomed?

About six months after it has happened.

It’s a sad fact for investors. You don’t know for sure that the market has hit rock bottom until long after the fact.

The Australian share market slumped more than 10% during the six weeks leading up to June 25. It’s up 7.9% since then.

Of course, that doesn’t mean the market has bottomed. We’re only talking three weeks. We’ll only know for certain if 25 June was a good time to buy five or six months from now.

But one thing we’re almost certain of is that there’s a changing of the guard in one of the world’s most important markets…

No. We’re not talking about the resource sector.

Quite frankly it’s hard to see anyone knocking the likes of BHP Billiton [ASX: BHP] or Rio Tinto [ASX: RIO] off their perch.

Even for all the attention given Fortescue Metals [ASX: FMG], it’s still barely one-sixteenth the size of BHP, and one-tenth the size of Rio.

Besides, if Fortescue grew to be three, four, five or ten times greater, it won’t impact BHP’s market position. It’s not as though steel makers can make a higher quality steel by using Fortescue’s iron ore rather than BHP’s iron ore.

Once the ore becomes the pure metal, there’s no difference…that means there’s no point of difference between the products. In the resource sector it all comes down to volume and speed – how much can they ship and how soon?

The sector we’re talking about is different. Upstarts and start-ups can have a major impact on established and seemingly invincible companies. We’re talking about the tech sector

Avoiding Valuation Bubbles

You only have to look at Apple [NASDAQ: AAPL]. This time last year, investors loved the stock. Its shares traded above USD$600 and folks started talking about it becoming a USD$1,000 stock.

Things looked pretty good when the stock hit USD$700. But then the stock went into reverse. Today it’s trading for USD$425.

Why the about face?

Apple today is where Microsoft [NASDAQ: MSFT] was in 2000.

The company has gained as much market share as it can in the key segments of smartphones, tablets, and music and video content.

When Apple traded at USD$600, investors assumed Apple could keep growing at the same rate that had taken it from USD$300.

But here’s the problem. In order for Apple to hit USD$1,000 and keep the same valuation, the company would need to increase profits to USD$100 billion – a 150% profit increase in just one year.

Either investors didn’t think about that when they paid USD$600 a year ago or they thought the Apple boom would never end. In other words, with the benefit of hindsight it’s clear the Apple share price was a price bubble.

Just like the housing bubble, dot-com bubble, resource bubble and the recent gold bubble.

That’s bad news for Apple. It means rather than growing revenues, profits and market share, Apple has to go into defensive mode, just like Microsoft 12 years ago.

While that was bad news for Microsoft and will be bad news for Apple, it does of course create opportunities…

Finding the Next Global Tech Stock ‘Superstars’

This is where tech stocks are different to resource stocks. Steel is steel. And copper is copper. But one mobile device or software program isn’t necessarily the same as another mobile device or software program.

Because of this difference and the potential to offer product differentiation to the market, the tech sector is much more attractive to venture capitalists.

Take recent numbers from the US National Venture Capital Association (NVCA). In the first six months of 2013, the NVCA records 577 venture capital deals. Of those, 251 relate to software and 67 media and entertainment.

That’s Apple’s biggest problem. Entrepreneurs see the profits achievable in the tech industry and so they want a part of it. If there’s one thing true in business it’s that success breeds competition.

And there’s a whole lot of competition in the tech sector.

It’s the striving for success that presents tech investors with such great growth opportunities. Investors who bought Apple stock for less that USD$20 in 2004 probably couldn’t care less about the 40% price drop over the past eight months.

But for the new investors looking for growth, it’s fair to say you won’t find that growth in Apple any more.

That’s the excitement of looking for opportunities in tech stocks. When the big old companies like Microsoft and Apple reach their growth limits, it’s time to look elsewhere.

And that means finding the Microsoft’s and Apple’s of tomorrow. Trust us, they’re out there. We figure we’ve found at least a couple of potential future tech ‘superstars’ in Revolutionary Tech Investor.

But with so much going on in this sector, the opportunities will keep coming. We’ll keep looking for the stocks with the best innovations that have the best chance of exploiting their chosen market.

Cheers,
Kris+

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Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

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