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 growth. At the same time, communications spending should continue to grow in excess of 30% a year. And because US high-tech companies dominate the world market, they are less susceptible to domestic recessions. Where are the winners? Everywhere.
Look at semiconductor equipment manufacturers. These companies' stock prices could rise by as much as 50% 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.
Chips with everything
Wall Street predicts domestic shipments will be down this year. But the Street is wrong. Previous industry downturns were caused by recessions, but 1996 demand for end-user products was up. With the technology change to 0.25 micron lines and the huge demand for silicon, chipmakers must increase capacity. Expect pull-ins beginning in the March quarter, giving a slightly up 1997 and a booming 1998.I recommend Applied Materials, the largest supplier with the broadest product line, as a core holding. Also smaller, specialised companies with advanced processes: Mattson Technology with rapid thermal processing and chemical vapour deposition, and Plasma & Materials with etching technology.
For the chipmakers, stock prices could rise by 35%. Intel continues to drive the price/performance curve in the microprocessor business. Its stock should earn $7 a share in 1997, and sell for about 20 times that.
Fabless chip companies - those which contract out chip production - will do well because they'll find sufficient fab capacity. I'm buying Cirrus Logic, a producer of graphics accelerators, disk-drive controllers and PC chips. Cirrus is a supplier to Intel, and its MiCRUS venture with IBM will allow swift expansion as volume picks up. Of companies that own their production lines, I continue to hold LSI Logic Corporation and would buy Integrated Device Technology and Cypress. Avoid "Micron" and Texas Instruments - I expect DRAM prices to dive by a third this year.
Servers with a smile
The server market should serve up a 20% increase in stock prices; this area has seen growth in big UNIX servers for Fortune 500 client/ server systems. Of the major companies, 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 follows. PC sales exceeded expectations in the December quarter - look for growth of 20% in 1997. The Windows NT corporate upgrade cycle and Intel's multimedia Pentium chip will set off a round of consumer upgrades.
Growth in home computing fell to about 8% for the first three quarters of 1996. In 1997 I expect that rate to jump close to 18%. The corporate market will grow faster.
Companies in the lucrative software industry should see a 30% growth in stock prices. Microsoft continues to take the lead - some analysts estimate that Gates' empire controls more than 80% of the market for office suites. Adobe, the biggest PC software company not standing toe-to-toe with Microsoft on most of its product line, plans major upgrades in fiscal 1997. It is dusting its competitors in electronic publishing and is tied with Macromedia in multimedia. Given Internet-driven growth in those markets, I am an aggressive buyer of Adobe and Macromedia.
Beyond PCs, the relational database vendors continue to thrive. Informix is healthy after its purchase of privately funded Illustra Information Systems, and is a good buy under $20. To compete, Oracle needs to rewrite its system. Likewise Sybase; the company is in deep shit.
TWIT$
TWIT$ is fully invested in stocks that look undervalued.
The Wired Interactive Technology Fund (TWIT$)
Company Primary Business Symbol Shares Price Nov 1 Since Oct 1 Action LSI Logic Corporation Semiconductors LSI 7,800 26 5/8 + 6 1/8 hold Applied Materials Inc. Semiconductor equip. AMAT 4,000 38 1/8 + 12 1/8 hold The Walt Disney Company Entertainment DIS 1,500 73 7/8 + 8 3/8 hold 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 Microprocessors INTC 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 Inc. Disk drives SEG 300 40 3/4 - 24 5/8 hold
Portfolio Value $1,794,018.75* (+ 79.40% overall) + 17.38%
* £1,093,913.87; £1 = $1.64 on Dec 9
The Wired Interactive Technology Fund is a portfolio of share recommendations, which began investing a virtual stake of US$1 million on December 1st 1994. Wired UK follows its fortunes monthly.
TWIT$ is a model established by Wired, not an officially traded portfolio. Michael Murphy is a professional money manager who may have a personal interest in stocks listed in TWIT$ or mentioned in this column. Wired readers who use this information for investment decisions do so at their own risk.
Michael Murphy is a money manager who publishes the California Technology Stock Letter.