Follow the Money
Windows Winners
Windows NT is driving a substantial upgrade cycle in the US. Sales of 486s – which can't run 32-bit software – are sagging, while Pentium sales are up. Because the necessary upgrades require more memory, faster modems, more complex software, et cetera, the whole electronics industry benefits. That cycle will spread around the world this year as Europe recovers from a near-recession and the Far East continues its double-digit growth. At the same time, communications spending should continue to grow in excess of 30 percent a year. And because US companies dominate the world market, they are less susceptible to domestic recessions. Where are the winners? Everywhere.
Fab future
Look at semiconductor equipment manufacturers. These companies' stock prices could rise as much as 50 percent this year. More than 120 chip fabrication facilities are scheduled to be built over the next three years, several at a cost of US$1 billion or more. Wall Street predicts domestic shipments will be sharply down this year. But the Street is wrong. While previous industry downturns were caused by recessions, demand for end-user products was up across the board last year. With the huge demand for silicon and the technology change to 0.25 micron lines under way, chipmakers can't hold off on increasing capacity. I expect pull-ins beginning in the March quarter, leading to a slightly up 1997 and a booming 1998. In this stock sector, I recommend Applied Materials – the largest supplier with the broadest product line – as a core holding. Then I would buy smaller, specialty companies with advanced processes: Mattson Technology for rapid thermal processing and chemical vapor deposition, Plasma & Materials for etching technology, OnTrak Systems for wafer cleaning, Genus for high-energy ion implantation, and Credence Systems for chip testing.For the chipmakers themselves, stock prices could rise 35 percent. Intel continues to drive the price/performance curve in the microprocessor business, leaving competitors to pedal faster or fall by the wayside. Intel stock should earn $7 a share in 1997 and sell for about 20 times that – $140.Life for fabless chip companies – those that contract out for production of their chip designs – is easy because they can find sufficient capacity. I'm buying Cirrus Logic, a producer of graphics accelerators, disk-drive controllers, and audio and other PC chips. Cirrus is a major supplier to Intel, and its MiCRUS venture with IBM will allow it to expand quickly.
DRAM drop
For companies that own their production lines, I continue to hold LSI Logic and would buy Integrated Device Technology and Cypress, suppliers of the fast, 1-Mbit SRAM chips that surround the Pentium processor. Both are well diversified, with significant non-SRAM revenue. Avoid Micron and Texas Instruments – I expect DRAM prices to dive this year. Meanwhile, the server market should offer a 20 percent increase in stock prices. The recent growth in this area has been in big Unix servers for Fortune 500 client/server systems. While Hewlett-Packard, Tandem, Digital Equipment, and IBM all have competitive products, Sequent and Sun are not burdened by an installed base of proprietary systems. However, Windows NT-powered NeTpower or Netframe servers are awesome competition for midsize Unix machines due to lower PC hardware cost and a huge software library. NT server sales exceeded Unix sales in the first quarter of 1996 and are widening their lead. I'm putting my money on Sequent and Netframe; each offers a robust architecture and full NT compatibility without the obstacles of a proprietary installed base. I'm also looking forward to a NeTpower IPO.As the server market booms, demand for clients will follow. PC sales exceeded expectations in the December quarter, and in spite of some residual gloom and doom on Wall Street due to slower growth in the home computer market, I expect the industry to grow 20 percent in 1997. In addition to the Windows NT corporate upgrade cycle, Intel's new multimedia Pentium chip will set off a round of consumer upgrades. After two great years, home computing fell to about an 8 percent growth rate for the first three quarters of 1996. In 1997 I expect that rate to jump close to 18 percent. The corporate market will grow faster.Companies in the lucrative software business should see a 30 percent rise in stock price. Microsoft continues to lead the industry. Some analysts estimate that the Gates empire controls more than 80 percent of the market for office suites.
Do Adobe
Although Novell sold WordPerfect to Corel, it's still losing to Microsoft in the LAN business – avoid the stock. Adobe, the biggest PC software company not standing toe-to-toe with Microsoft across most of its product line, plans major upgrades in fiscal 1997. Adobe is dusting its competitors in electronic publishing and is tied with Macromedia in multimedia. Given the Internet-driven growth in both of those markets, I am an aggressive buyer of Adobe and Macromedia. The relational database vendors continue to thrive. Infor-mix is well positioned after its purchase of Illustra Information Systems and is a good buy under $20. While Oracle has market share, it needs to rewrite its system to compete with Informix. Sybase also needs a rewrite – it is in deep shit.
The Wired Interactive Technology Fund
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Company | Primary | Symbol | Shares | Close Dec 2 | Since Nov 1 | Action
LSI Logic Corporation | Semiconductors | LSI | 7,800 | 32 5/8 | +6 1/8 | hold
Applied Materials Inc. | Semiconductor equip. | AMAT | 4,000 | 38 1/4 | +12 1/8 | hold
The Walt Disney Company | Entertainment | DIS | <1,500 | 73 7/8
Apple Computer Company | Hw/sw | AAPL | 4,800 | 25 1/8 | + 7/8 | hold
Tele-Communications Inc. | Cable television | TCOMA | 4,800 | 14 | + 1 | hold
Intel Corporation | Microchips | TCOMA | 3,000 | 127 1/8 | + 18 3/8 | hold
Adobe Systems Inc. | Software | ADBE | 5,000 | 43 3/8 | + 9 1/8 | hold
Mattson Technology | Semiconductor equip. | MTSN | 30,000 | 9 7/8 | +1 1/8 | hold
Euphonix | Audio sw | EUPH | 17,000 | 4 1/2 | 1/8 | hold
Diamond Multimedia | Multimedia hw | DIMD | 7,000 | 14 3/4 | 3 1/4 | hold
Seagate Technology Drives | Disk Drives | SEG | 300 | 40 3/4 | 24 5/8 | hold
Portfolio Value | $1,794,018.75| (+ 79.40% overall)| +17.38%
TWIT$
TWIT$ is fully invested in stocks that look undervalued. Michael Murphy is a money manager who publishes the California Technology Stock Letter in Half Moon Bay, California.
