2012: The Tech Boom Comeback

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Another “Tech Boom” Is Heading Our Way

“Technology stocks have never been this cheap. Yet the companies have loads of cash, and in many cases, recurring revenue streams…”– Barron’s, October 22, 2011

it’s time to think about what’s in store for 2012. Where’s the opportunity going to be for big profits? Usually, my colleagues and I discuss and debate several investment ideas heading into the New Year. It typically takes several days, or even weeks, but we eventually agree on our favorite themes.

This year we could have skipped the whole process… the answer was THAT obvious.

It’s as clear as day – 2012 is going to be a HUGE year for tech stocks. Why are we so certain about tech?

To put it simply, technology usage is at an all-time, earth-shattering high. And similar to 1999, the investment community is going to jump all over this, sending prices spiraling upward.

To see it happening, just look around…Everywhere you turn, people are using smartphones, tablet PCs, laptops, and more. Customers do their banking on their mobile phones and their holiday shopping on the internet. More employees than ever are working from home or the local coffee shop using razor thin laptops. And companies are generating substantial business using websites, Facebook and Twitter.

Yet despite the explosion of tech usage, tech stocks are historically cheap.

Check this out…

In 1999, the average tech stock P/E was a whopping 40x. Today, it’s a miniscule 13x. That’s low for any industry, but it’s flat out absurd for technology companies! After all, technology is the ultimate growth investment. And thanks to innovative new products, the industry is constantly evolving. Most importantly, demand for new technology is at record highs. Both businesses and individuals are loading up on the latest products sporting new and innovative technologies.

As proof, the world’s greatest tech company, Apple (NASDAQ: AAPL), is betting big next year on the coming boom. Apple plans to spend $8 billion on capital investments in 2012. That’s more than the market value of most public companies! And it’s DOUBLE what they spent in 2011.

So why the huge increase in spending? Because they know tech is booming. They can see the demand for their wildly popular products. No wonder they’re putting $900 million into new stores alone. And it’s not just Apple’s products. Demand for new, trendy tech gadgets and innovative services is reaching an all-time high. Let’s get into the specifics… and discuss how you can cash in on the coming “tech boom” in your own portfolio!

Tech’s Unstoppable Growth Story

The huge opportunity in technology stocks is being driven by one thing and one thing only. It’s the skyrocketing growth of overall tech users. But why are so many more people using technology today than ever before? I can sum it up with two reasons… easy, affordable internet access and the move to mobile devices.

Let’s start with the internet…

It shouldn’t be a surprise to anyone, but internet usage has exploded in recent years. Broadband connections are cheap and easy to get these days. Wireless hot spots are everywhere. And you can quickly access the web from your phone or tablet PC… more on that in a minute. It’s just a matter of time before the internet bypasses television as the public’s main source of news and info. Some analysts believe this could happen by 2014. I think it could happen even sooner.

Take a look at this chart…

As you can see, internet traffic is expected to mushroom in the immediate future.  And that’s not all…

Social media has exploded in popularity.

Who hasn’t heard of Facebook or even Twitter by now? If you’re reading this, there’s a good chance you have a Facebook account or know several people that do. It’s hardly a wild assumption on my part… Facebook has over 800 million users. Think about it.  That’s over 10% of the world’s population!

What’s more, companies now realize how important and widespread internet usage is. They’re sinking $29 billion into internet advertising this year alone. But as fast as the internet has grown, mobile internet usage is growing even faster.

Check this out…

Morgan Stanley internet analyst Mary Meeker predicts there will be more mobile internet users than desktop internet users by 2014. And she expects there to be almost 2 billion worldwide mobile internet users by 2015. Meeker sees several trends combining to drive this growth. These include the widespread adoption of 3G technology, the growing prominence of social networking, more extensive use of mobile video technology, voice over IP, and impressive, trendy mobile devices.

Clearly, mobile internet has a lot going for it! Just look at the number of mobile users in the US using the internet for search purposes…

That’s 10x growth in just five years! So who stands to gain the most from the rise of mobile internet users? Here’s what I’d put my money on…

Smartphone and Tablet PC makers.

You see, demand for mobile devices that can access the internet is going to continue rising. And these relatively new product areas are perfectly positioned to reap the rewards. Just check out an Apple store on the day a new iPhone or iPad is released. You’ll be amazed at how long the lines are. I’ve seen them go around the block! And that’s not all…

Jefferies’ analysts paint an even rosier picture for smartphones and tablets in 2020. They expect the number of mobile users to reach a whopping 7.6 billion worldwide. And those users are expected to purchase 3.7 billion handsets each year, 81% of them smartphones. And what about tablets? How about an expected 595 million sold in 2020. That’s up from 70 million this year.

Now those are some huge numbers! And Jefferies isn’t the only one optimistic about the trend in mobile devices. Here’s what Intel (NASDAQ: INTC) CEO Paul Otellini had to say, “I think the overall shift to mobility is one of THE megatrends that’s out there.”

Bottom line…

We’ve all heard the expression; a rising tide lifts all boats. Well, it couldn’t be truer for what’s going on in tech. In other words, the explosive growth in internet usage, especially mobile internet, is going to bring on another “internet boom” in 2012. And if any of you remember the last internet boom, you KNOW how important it is to be one of the first ones in. We’ll talk more about that in a minute, for now let’s take a look at another area of tech set for enormous profits…

The Smartphone Explosion

It should come as no surprise that one of the most explosive trends in technology these days is the move toward smartphones. I think the best way to understand how important smartphones are in today’s society is to stand outside an Apple store on the day a new iPhone is launched. The lines, the fervor… it’s unbelievable. People seem to love their smartphones as much as they love their pets.

And of course, you can do just about anything on your smartphone these days. Whether it’s banking online, buying movie tickets, having a video chat with your friends, playing games… you name it. I’ve heard you can even make phone calls on these crazy devices! Here’s an interesting fact…

According to a Forrester research report, 93% of online adults own a mobile phone. However, most of these people are using ordinary phones, not smartphones. Even among people ages 32 to 45, a group you would expect to be heavy users of smartphones, just 50% own them. Clearly, there’s tremendous room for growth in coming years.

As a matter of fact, Morgan Stanley’s Meeker expects smartphones sales to pass computer sales by 2012. She projects smartphone sales in 2012 of 450 million units… that’s more than PCs and laptops combined. And she predicts that number to balloon to 650 million units by 2013. As I mentioned earlier, several catalysts will drive this growth. The global availability of 3G will be a factor. The growing popularity of video chat and voice over internet services will also contribute. Not to mention, cool devices such as the iPhone are extremely sought after by consumers.

And then there’s social networking.

The incredible popularity of social networking sites such as Facebook is a major contributor to the growth of smartphones. How many times a day do you see people surfing Facebook on their phone? They just can’t wait to see who’s commented on the latest photo of their kid playing soccer.

These days, new mobile phones come with a Facebook app already installed. And it’s usually right on the front page! Okay, so we know smartphones are exploding in popularity. But who stands to gain? Of course, there are the smartphone makers themselves like Apple and Research In Motion (NASDAQ: RIMM), maker of the Blackberry. Then there’s Google (NASDAQ: GOOG) who’s Android operating system is rapidly becoming the mostly widely used in mobile phones.

On the other hand, smaller companies like ARM Holdings (NASDAQ: ARMH) could be in great position moving forward. They make the processors for many popular mobile devices. And don’t forget the software and internet companies. Facebook will IPO in 2012. And mobile game maker Zynga (NASDAQ: ZNGA), whose IPO debuted a couple weeks ago at $10, could thrive on smartphone growth. Clearly, the smartphone boom is going to benefit all sorts of companies… and be a huge boon for tech stocks in general.

As great as the market for smartphones is, there’s also another, similar explosion going on in another area of technology…

The Hyper-Growth of Tablet PCs

While smartphones are already seeing exponential growth, the market for tablet PCs is just starting to heat up. Tablet PCs, like Apple’s iPad, are gaining significant market share from traditional computers and laptops. Keep in mind, 70 million tablets are expected to be sold in 2011. And by 2015, Gartner Research projects tablets will account for 50% of laptop shipments. Once again, we can thank Apple for kick starting the tablet revolution.

The iPad is an amazingly cool and useful device. And while it’s not cheap ($499 minimum, $699 for the high-end version), it compares in price to bargain basement laptops. And it’s quite a bit easier to transport. But besides the “cool” factor, tablets are just plain easy to use. And when most people use computers primarily for surfing the web, checking Facebook, making online purchases, and playing games… well, there simply isn’t a better choice than a tablet.

And as I just mentioned, the tablet revolution is still in its early phases. There’s enormous room for growth.

Just recently, Amazon (NASDAQ: AMZN) started shipping their Kindle Fire tablet. At just $199, it’s by far the cheapest tablet product on the market. It could significantly stoke demand for tablets for years to come. What’s more, Forrester’s report shows tablet ownership is only at 10% of the online population – across all generations. However, 60% of younger adults (23 to 31) expect to buy a tablet in the near future.

There’s no doubt about it, tablets are going to experience exponential growth. And sales are ramping up as we speak. Remember, Jefferies expects 595 million tablets to be sold in 2020. That’s not as far away as you think. And it’s a huge jump from this year’s expected 70 million units. So it’s no surprise to see Tim Cook, CEO of Apple say, “I still believe the tablet market will be larger than the PC market”. And this is from the leader of the company, which got their start in the personal computing industry.

Here’s the thing…

We’re on the ground floor of a new movement that will be bigger than PCs. Think about that! As huge as the PC industry has become, tablets could be even bigger. Now several companies stand to gain from the coming tablet boom… Of course, just like with smartphones, Apple and Google are big players in the tablet market (Apple for the iPad and Google for the Android operating system).

Now, we can add Amazon to the list of major players with their Kindle Fire. They could become the largest tablet seller in a hurry with their product’s low price point. Another beneficiary, Nvidia (NASDAQ: NVDA) has become an important company for tablets. They’re now producing some of the top performing processors for tablet computers… and could become THE stock to own in 2012.

So exactly how does this growth in tablets set the stage for a “tech boom” in 2012?

Because more tablets mean more people are using the internet which in turn means more advertising and sales opportunities which ultimately means a lot more dollars flowing into tech companies of all shapes and sizes. And when dollars begin flowing into this particular sector, WATCH OUT! because the stock prices of these companies can move in a hurry!

This One’s Going To Be Big…

There’s no denying we’re on the verge of another tech run-up of epic proportions. All the stars are aligning to signal the biggest bull market in technology since the mania of the 1990s. “Why” you ask?

Well we’ve already covered the explosion in the number of people using the internet, especially the mobile internet. We’ve also covered the rise of smartphones and tablet computers. In addition to all that, which by themselves will bring tons of new cash to the industry, there are a few other things going on behind the scenes.

  • Despite the US being on the brink of a recession, the number of new tech jobs is booming. In fact, while the overall economy has a 10% unemployment rate, the rate is only 3.2% in the technology field… 
  • The IPO calendar for upcoming technology stocks is larger than its ever been. You literally have dozens of new tech companies slated to go public next year with a total valuation estimate of nearly 1 TRILLION dollars. 1999 pales in comparison to that… 
  • For all you technical analysis buffs, you’ll notice that the number of tech stocks below their 200-day moving average is higher than it’s been in a long time. And you know what that typically means… higher stock prices ahead! 
  • For the first time in his 50+ year investing history, Warren Buffett purchased a tech stock. That’s right. The man considered the greatest investor of all time decided now was a good time to start investing in tech. If that’s not a sign of things to come, I don’t know what is!

Look the writing’s on the wall… technology stocks are about to skyrocket. So if you’re looking to make a lot of money very quickly, this is the sector you need to be looking at! With that said, let’s take a look at a few key areas in this sector where you should focus your investments…

Where To Put Your Money In 2012

Because of the explosion of the mobile internet, and the off-the-charts growth of smartphones and tablets, several tech sectors stand to benefit in a big way in 2012. Don’t forget, a rising tide lifts all boats!

Take a look at these sectors…

  • Communication Equipment: These companies design and build the actual equipment, like smartphone handsets. Demand for these products will continue to rise as more and more people upgrade their devices.
  • Data Storage: With the rise of the mobile internet, data storage is moving to a cloud computing model. In other words, data isn’t stored on your device, but on the web. Companies will need plenty of servers and data services as this trend continues to gain steam. 
  • Internet Information Providers: Of course, the content of the web itself is vital. Companies providing that content will be busier than ever in the coming months. 
  • Multimedia: The trend in software development is the creation of apps and games exclusively for mobile devices. These products are skyrocketing in popularity. 
  • Networking: Don’t forget, all the data needs to reach billions of online users. Networking is vital in making this happen. 
  • Semiconductors – Specialized: For every mobile device sold, there also needs to be a processor inside making it work. The demand for specialized chips for mobile devices is going to surge even higher as more products are sold. 
  • Wireless Communications: Even the fanciest tablet still requires an internet connection to surf the web. Wireless technology is a key component of the new golden age of technology.

These are just a few examples of some areas where you’ll want to be invested in 2012.

Putting It All Together For Profits

Undoubtedly 2012 is going to be a hot year for tech stocks. The circumstances we’re seeing right now parallel very closely to what we saw in the last “tech boom” in 1999. Only this time, the companies being bid up are REAL companies with REAL demand for their products. As you know, there are a lot of investor dollars sitting on the sidelines right now. And we think much of it will be headed to tech in 2012. And once the ball gets rolling, there’ll be no stopping it.

You’ll see investor mania for new IPOs. You’ll see boring blue-chips surging. You’ll see start-ups popping up all over the place. And most importantly, you’ll see the stock prices of many of these companies shooting to the moon!

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