Wall Street is filled with bears who don’t believe in the stock market’s 45 percent climb up from the March bottom. They think the whole move is chimerical, and that when the Federal Reserve stops flooding the economy with cheap money, we will be crushed by gigantic government debt, higher taxes, socialized medicine, weak consumer spending, and a concomitant loss of thousands of hard-earned Dow Jones points.
And I say: Who cares? There’s something bigger going on, something that transcends the daily ups and downs of the economy and the stock market. It’s something that screams, Look at me, Invest in me, Get rich with me. That something is the mobile Internet.
It’s been a long time since we’ve had any sector that can break free from the entire market’s gravitational pull, especially a sector from the beleaguered and perennially disappointing tech world. Technology investing has been a wasteland for a decade now, with the NASDAQ still down 60 percent from its end-of-century highs. The dot-com bomb’s aftereffects are still with us, like radiation from Hiroshima. A generation of investors never returned to the stock market after that blast. Those brave souls who did tiptoe back just got hit with a second bomb of a bear market, the worst since the Great Depression. After years in which tech made you more money than anything else, the onetime innovators—the Intels, Microsofts, Ciscos, and Oracles of the world—became destroyers of retirement and college funds, pure toxic investments. All that’s about to change.
The secret to great tech investing is catching waves of game-changing technology—big ideas and products that obliterate the old ways of doing things—early. Think about it. Investing in Microsoft and Intel back in the day made you multiyear fortunes as the personal computer trounced electric typewriters then word processors and ultimately mainframes, offering potent, convenient, and portable computing power at a ridiculously low price. The Internet itself caused the next revolution, with Apple, Amazon, Yahoo!, and Google mowing down all manner of brick-and-mortar media and commerce. From September 1996, when the Internet-stock surge started, to 2000, when it peaked, we saw a 305 percent uptick in Intel, a 662 percent gain in Microsoft, an 803 percent rally in Cisco, a 5,859 percent increase in Amazon, and a 13,948 percent surge in Yahoo! Even America Online jumped 4,189 percent during that period.
As big and as game-changing as the personal computer and the Internet were, I believe the mobile Internet—the integration of voice, data, video, and storage in one handheld device—will be more lucrative than both. Maybe both put together. That may sound far-fetched now, but these devices, chock-full of applications and hardware that have begun to rival those of personal computers, have finally realized the elusive holy grail. As any twentysomething, or even middle-schooler, knows, once you procure a smartphone, you can throw away pretty much every publication, every guide, every television, every camera, every music device, heck, every gizmo you have, save your toaster oven. You just don’t need ’em anymore.
It’s not just the dazzling technology that’s driving things. It’s the size of the market and the speed at which companies and consumers are getting onboard. It took a half-dozen years and a host of competitors like Dell, Gateway, and Compaq to produce personal computers cheap enough to entice the masses. Thanks to the substantial subsidies offered by Verizon, Sprint, AT&T, and T-Mobile in their endless battles for market share, Americans are buying up smartphones and calling plans much faster than they bought PCs.
And the U.S. market is tiny versus the overseas arena. Beijing alone just committed $40 billion to build a smartphone network that will cover the whole nation, and the big telephone companies in China plan on subsidizing the phones with the same zeal as the American firms—obviously with millions more customers. Currently, there are as many as 4 billion cell-phone users worldwide, but only 12 percent use smartphones. Given the superiority of the product and the aggressive pricing, I expect we will see a total replacement of dumb phones with smart ones rather quickly. You’re talking about a market that could grow eightfold in just a few years.
How can you cash in on this trend? Don’t out-think this one. Apple’s the best maker of smartphones, and the company’s technological breakthroughs and applications have put the iPhone far ahead of the pack. AT&T is subsidizing the Apple for hundreds of dollars per customer, and Verizon wants in on the distribution, too, for fear of being left in the dust without an iPhone in its suite of products. Apple sold an amazing 5.2 million phones this past quarter and might have sold twice as many if it could have produced them fast enough. Watch what happens next quarter—as I expect one company alone, China Unicom, to purchase as many iPhones as Apple sold all last quarter. And China Unicom is just one of multiple distributors blessed by the Chinese government to sell phones.
Even though Apple’s got the hottest, smartest phone, it currently accounts for only 8 percent of the cell-phone market; but it has hogged 32 percent of the cell-phone profits because the margins it can command are so large. It’s obvious to me, given the edge and the multiple applications that the iPhone has, that the only thing holding back Apple will be manufacturing capacity. That’s why I think this $160 stock will go to $200 shortly after the Chinese start buying. Research In Motion, the company behind the BlackBerry and the originator of the smartphone, and Palm, with its Pre, aren’t positioned as well as Apple, but they’re also good smartphone plays.
So is Qualcomm, which makes the semiconductors, the brains, for almost all of the next-generation smartphones. The vast majority of future smartphones will be built around a Qualcomm chip. The greatness of owning Qualcomm is that you don’t care which phone-maker ultimately prevails, as the company’s got its tentacles on just about every player. Consider it the functional equivalent of Intel.
My next pick would be Cisco, which provides the infrastructure that the telecommunications giants need to get voice and data to its rightful place. It’s hard to build a network powerful enough to handle these cell phones without calling on the No. 1 networking company in the world to do it for you. After a huge decline in equipment orders during the recession, Cisco just announced that it has seen its first significant order increase in more than a year, a lot of it related to the mobile Internet. Three smaller infrastructure plays, Ciena, Tellabs, and ADC Telecom, enable streaming video to look like high-quality TV on your cell phone. All three, bizarrely, have gone largely unrecognized, despite their important supporting-cast roles in making these devices so powerful and useful.
Then there are a host of little companies that power the cell phone’s coolest components: Cypress Semiconductor makes the touch screens; SanDisk makes the short-term memory that allows you to store reams of data, music, and video; Tessera has the patents for the optics for the smallest and best cameras; and Cree provides the lighting. ON Semiconductor, RF Micro and Skyworks Solutions provide the signal strength needed to accept and receive information on your phone. And who knows what ap producers or software developers or mobile-oriented websites will emerge as winners in this arena. A market this big generates all kinds of lucrative submarkets.
The questions you have to ask when you spot big new investing themes are, Am I late to the party? and Have the stocks moved up too much? The answers in this case are nope and not a chance. The products themselves will only get better and cheaper, and vast markets for them remain untapped. The large institutional money managers, never especially hip to new technologies and still gun-shy from the last tech bust, have been slow to place bets on this idea, keeping stock prices attractive. We’re only in the first inning of the global changeover from the old technology to the new. Getting in now is just plain smart.
James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned Qualcomm and Cisco for his charitable trust, ActionAlertsPlus.com.
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