Can’t-Miss Trends: Tech Investing Special Report, Part I

by Brad Moon | May 8, 2013 12:30 pm

The Nasdaq outperformed other indices in 2012, gaining 15.9% over the year compared to 7.3% for the Dow and 13.4% for the S&P 500, a number that would have been much larger if not for Apple’s (NASDAQ:AAPL[1]) meltdown in the final months of the year. Still, the fact that the tech-heavy index did so well — despite its star stock’s stumble and gaffes like the Facebook (NASDAQ:FB[2]) IPO — shows that not only was the stock market alive and well in 2012, but tech investing was a leading way to capitalize on this growth.

In 2013, the stock market has the potential to outperform 2012. However, even the big winners from last year aren’t necessarily a slam dunk for investors looking for a growth stock.

Popularity and sales numbers don’t necessarily translate directly into stock price. There are many variables in play that can impact the value of a technology company’s stock. Some of these — overall sales trends, for example — we can track and account for. Others, such as consumer acceptance of a key product, can be a bit tougher. Then there are the wildcards that can completely disrupt things. These can be anything from a game-changing product release (think about what happened when Apple suddenly stormed the smartphone market in 2007 with the iPhone) to a natural disaster that knocks out a key manufacturing facility or component supplier.

We can’t predict all of these variables, but tech rumor sites and consumer demand help to provide hints on some of the potential product releases. Being informed about a company’s operations can go a long way toward assessing how it might be impacted by something like a natural disaster. Staying on top of all the trends and rumors, separating the possible from the unlikely, analyzing financial results and anticipating the outcome of disruptive events before everyone else figures it out is key to coming out ahead in tech investing.

To help you make an informed decision about which technology companies could see real stock price growth, we’ve put together this guide to tech investing in 2013. Today we’ll cover 10 trends to watch for in 2013; tomorrow will be key growth markets and potential disruptors; and Friday we’ll cover specific companies and stock outlooks.

Key Technology Trends

Trends shouldn’t catch anyone by surprise — the very nature of the term indicates that this is something we’ve seen developing. However, trends are important in terms of helping to identify what companies might be hot (if they happen to be in position to take advantage of a growing trend). On the other hand, misreading a trend can result in a company’s stock taking a dive, with years of playing catch-up.

For example, Blackberry (NASDAQ:BBRY[3]) was a smartphone pioneer that failed to see the trend toward consumer adoption of the devices and paid a steep price, with its stock tanking 96% in four years as it was left behind by the iPhone and Android smartphones that non-corporate users preferred. Samsung (PINK:SSNLF[4]) saw a trend toward customers looking for either a bigger smartphone or smaller tablet and introduced the Galaxy Note, a 5.3-inch device that competitors mocked … until Samsung sold 10 million of them.

Here are 10 technology trends we’re closely watching in 2013:

1. Next-Generation Video Game Consoles

This is a launch year for a new generation of home video game consoles (the last time all the manufacturers released new versions was 2005/2006). Nintendo (PINK:NTDOY[5]) was first with Wii U in late 2012, Sony (NYSE:SNE[6]) has announced the PS4 and Microsoft (NASDAQ:MSFT[7]) is expected to announce the next Xbox[8] on May 21.

The Wii U was another gamble on a new controller scheme by Nintendo, adopting a tablet-like pad that can be used with games or to play games standalone from a different room. The system has been a disaster, reportedly selling just 57,000 units[9] in the U.S. in January. Both Sony and Microsoft have a lot riding on their next-generation releases; the PS3 has sold roughly 77 million units for Sony while the Xbox 360 is nearing 76 million for Microsoft.

Besides staving off the threat of casual gaming on smartphones and tablets, the next-gen video game consoles represent a bridgehead to owning the living room — they can be used to deliver video content and drive TV sales.

2. Smartphone Battles

Apple has ruled the smartphone arena for the past four or five years. Its iPhone has been the standard other manufacturers copied and the top-selling smartphone (even though Google’s (NASDAQ:GOOG[10]) Android has a higher overall platform marketshare). But beginning last year with the Galaxy S III, Samsung has been challenging the iPhone and has begun to set trends that even Apple has been forced to follow, such as incorporating a bigger display in the iPhone 5. More manufacturers are abandoning the low-margin middle-of-the-road smartphone for premium devices, hoping to take a chunk out of Apple’s and Samsung’s control of high-margin devices.

As all this is going on, Microsoft and Blackberry will be battling it out for the all-important third place in mobile platform marketshare. Drop below third place, and you get lumped in with the “other” platforms — and risk being dropped from store shelves by wireless carriers.

3. Tablet War

Apple is losing market share, and while it’s still the single largest manufacturer of tablets, its iOS platform is no longer dominant against a slew of Android and Windows competitors. According to IDC, the company’s share of the market declined to 39.6%[11] in the first quarter. Apple has also had to react to Google and Amazon (NASDAQ:AMZN[12]) by releasing the iPad Mini, a smaller form factor it was historically dead set against. While the iPad Mini has been successful, it’s priced significantly lower than other iPads.

The tablet segment remains red-hot, with plenty of room for growth — IDC says world tablet sales grew 142.4% year-over year in the first quarter — but the question is whether Apple will be able to maintain tablet revenue and profit against competition … and with cheaper tablets an increasingly larger part of its product mix.

Making things more interesting, Samsung — which has been a bit of a nonstarter in the tablet market — looks to be making a serious run at it in 2013 with the Galaxy Note 8.

PC manufacturers and Microsoft also mounted an offensive in 2012 with hybrid PC/tablets and enterprise-grade tablets like the Surface Pro. This move was an attack on the iPad as well as a defensive move against the growing trend of tablets cutting into computer sales. In 2012, PC sales declined for the first time since 2001[13] — despite the release of Windows 8. Last year the trend of tablets replacing PCs hit a broad swath of companies focused on the PC industry, with Microsoft, Hewlett-Packard (NYSE:HPQ[14]), Dell (NASDAQ:DELL[15]), Intel (NASDAQ:INTC[16]) and others who failed to react to the tablet trend in time suffering as a result.

4. LED Lighting

Home, commercial and government budgets continue to be under pressure and “green” technologies continue to be boosted. Combined with general lack of enthusiasm (and disposal issues) with compact fluorescent bulbs and the lowering price point of LED bulbs (Cree (NASDAQ:CREE[17]) recently announced $10 LED light bulbs[18] being sold through Home Depot (NYSE:HD[19])), 2013 could be the watershed year where LED lighting takes off.

A report by RnR Market Research points to a world lighting market worth $78.3 billion[20] by 2016. With the current price point, cost and maintenance savings offered by LED bulbs, I expect commercial and consumer buyers to begin switching to LED in earnest this year.

5. Social Media

Facebook held an embarrassing 2012 IPO that put social media companies and their business models in the spotlight: How do you monetize hundreds of millions of users who have signed up for free accounts? How do you remain relevant when customers are fickle and quick to move to next big thing? There are a number of social media heavyweights that could be at the IPO stage in 2013, including Twitter (valued at $8 billion), Dropbox, Foursquare and Pinterest.

While Facebook has been profitable and is showing progress toward dealing with the fact that its users are increasingly mobile, it’s still far from the goldmine that early investors envisioned, resulting in a 29% slide from its IPO price. The slowing growth in Facebook’s user base, competition from new services and ongoing difficulty in generating profits that justify its share price — issues all social media companies face — are going to be a big part of the investment story for this area in 2013.

6. Cloud computing

It’s the reason companies like Netflix (NASDAQ:NFLX[21]) and Pinterest can get so big, so fast, without having to raise the capital needed to build, staff and operate their own data centers. It’s the reason software-as-a-service (SAAS) has been able to take off and is looked to by tech giants like H-P, IBM (NYSE:IBM[22]) and Dell as the future in the face of declining PC sales. It’s increasingly embraced by consumers as a storage locker and the way to share their documents, photos and music.

The cloud is also a way to keep mobile devices affordable, since online storage means less physical storage is required on a device — Apple can offer a 16GB iPhone or iPad with no memory expansion capability because owners can store their big movie files and app libraries in the cloud.

Cloud computing is expected to continue to take off in 2013. The total cloud computing market is expected to grow to $210 billion by 2016[23] (it was $79.9 billion in 2010). Vendors like IBM (SmartCloud), Amazon (AWS) and Microsoft (Azure) that sell cloud services will obviously benefit from this rapid growth, but there’s also a real uptick for the Ciscos (NASDAQ:CSCO[24]) and other companies that make the hardware and networking equipment needed to run the cloud.

7. Connected Devices (“The Internet of Things”)

2012 saw success of web-connected, app-controlled home technology. The Nest thermostat, Philips (NYSE:PHG[25]) HUE programmable LED lights, even a smart wireless plant sensor that texts you when it’s time to water your flowers. Appliances are increasingly becoming web-connected too. Expect more in 2013. Connected devices leverage the ubiquity of smartphones and home Wi-Fi connections, while offering consumers power savings and remote control, making them highly desirable.

Despite the growing popularity of connected devices, mainstream adoption hasn’t happened yet, largely because each device tends to be made by different manufacturer and requires its own software — managing a “plugged in” home is a lot more work and configuration than the average homeowner is willing to undertake. The real takeoff point will happen when one company figures out how to manage them all, instead of having 10 independently controlled smart devices.

8. Technology in Automobiles

Automakers have been embracing Apple, with Siri-ready infotainment systems (the latest Ferrari includes an iPad Mini in the dashboard) and smartphone apps are being integrated with cars to control functions like unlocking doors, pre-starting climate controls or honking the horn. Look for increased integration in 2013 (including apps that can help work with onboard diagnostics to provide maintenance info) and a battle over dominance.

Apple was big news in 2012, with nine automakers committing to incorporating Siri support in their vehicles by 2013: BMW, Land Rover, Toyota (NYSE:TM[26]), GM (NYSE:GM[27]), Jaguar, Chrysler, Mercedes-Benz, Audi and Honda (NYSE:HMC[28]) are all on board[29]. However, Microsoft is still a player (powering Ford’s (NYSE:F[30]) Sync) and Blackberry’s QNX powers many auto systems in vehicles from the likes of Hyundai, Acura and Porsche. Both of these companies will be battling to combat Apple’s intrusion — and with Apple’s widely publicized struggles with both Siri and its built-in Maps app, they may have some leverage. Android would like to be there too but has had little success in the automotive market, largely due to that platform’s diversity of devices and versions.

9. Wearable Technology

Google Glass, a wave of smart watches (including Pebble and possible offerings from Apple and Samsung) along with health and fitness devices from FitBit and others are the start of what is predicted to be a wave of wearable technology in 2013. Companies like Pebble have had a head start, but look for the independents to come under pressure as the big players flex their marketing muscle (including possibly packaging wearable devices with their smartphones the way they do now with headphones) and combining functions in a single device. For example, an Apple iWatch could combine smartwatch and biometric features, displacing multiple devices.

In the rush to incorporate biometric technology into mainstream consumer electronics, there’s a possibility that players like FitBit could become acquisition targets.

10. 3-D Printing

A big deal at CES, 3-D printers are hitting the magic $1,000 price point and adopting home-friendly designs in an attempt to market the devices at consumers. Once costing hundreds of thousands of dollars and targeted at commercial clients (such as auto makers who needed to prototype components), technology has advanced to the point that prices are dropping significantly. Combined with the nascent “maker” culture, 3-D printing could take off. This could very well follow the trend of inkjet and laser printers, which were first adopted commercially, then made their way into homes as prices dropped below the $1,000 threshold, eventually becoming commonplace.

With 3-D printers poised to make the leap from hobby kits and web order to store shelves, look for small 3-D printer companies like 3D Systems (NASDAQ:DDD[31]), Makerbot and Ultimaker to become acquisition targets for printer giants like H-P, Canon (NYSE:CAJ[32]) or Epson, who lack offerings in the area. Companies that offer the plastic spools used by 3-D printers are worth keeping an eye on too. (If you thought an inkjet printer ate supplies, a 3-D printer takes that consumption to a whole new level — historically those consumables can be far more profitable than the printers themselves.)

The biggest obstacle to 3-D printing having a breakout year in 2013 may not be consumer acceptance, but legal issues. With the growing recognition that once digital plans are shared online, people could conceivable print anything from replacement parts for their appliances to duplicates of best-selling toys like Lego, legal teams are gearing up for battle[33]. Patents, copyright and DRM issues could sink or set back the industry before it has the chance to go mainstream.

Check back tomorrow for important tech growth markets and possible disruptors — and Friday will bring the stock-by-stock rundown of the tech landscape.

At the time of publication, Moon had no positions in the securities mentioned.

  1. AAPL:
  2. FB:
  3. BBRY:
  4. SSNLF:
  5. NTDOY:
  6. SNE:
  7. MSFT:
  8. the next Xbox:
  9. reportedly selling just 57,000 units:
  10. GOOG:
  11. declined to 39.6%:
  12. AMZN:
  13. declined for the first time since 2001:
  14. HPQ:
  15. DELL:
  16. INTC:
  17. CREE:
  18. $10 LED light bulbs:
  19. HD:
  20. a world lighting market worth $78.3 billion:
  21. NFLX:
  22. IBM:
  23. $210 billion by 2016:
  24. CSCO:
  25. PHG:
  26. TM:
  27. GM:
  28. HMC:
  29. all on board:
  30. F:
  31. DDD:
  32. CAJ:
  33. legal teams are gearing up for battle:

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