How to Dominate the Future of Technology
Alexander is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The technology sector is one of the toughest places to invest. The potential risks are nearly endless. Sometimes a company messes up on earnings because management doesn’t know how to manage costs. In other instances, technology companies lose relevance due to competition. There’s also the possibility that technology becomes irrelevant because of new disruptive technologies.
In the end, we can all relate to the difficulty in investing in tech companies, which is why I am going to lay out the three companies that are most likely to survive, if not thrive, over the next ten years.
Take a bite out of the Apple
Apple (NASDAQ: AAPL) will be releasing a new version of its Apple iPhone in the coming months. The new iPhone will be released using the Apple iOS 7. In this generation of phones, I find it highly probable that Apple will improve its security features. This means lowering the amount of risk associated with jail breaking. Jail breaking allows a phone to be used across different carriers so long as basic 4G LTE standards are met.
If Apple was to release lower-end Apple iPhone devices in emerging markets, it is highly probable that someone will purchase phones in those cheaper markets and sell them in more expensive markets. Imagine someone selling an iPhone at a substantial discount, jail-broken, after bringing the phone in from China. This will create a new, lower-priced market, basically a black market. At the low-end, margins are smaller; therefore jail breaking must be eliminated for Apple's new product to be profitable.
Apple currently has standardized pricing across all markets, making it difficult for the company to tap into the vast profit potential of lower-end markets. This is why it is imperative for Apple in its new iOS 7 to release superior protection features.
If Apple releases lower-end phones, then it is highly probable that Apple has been able to figure out a way to reduce the amount of jail-broken phone devices even further. This will increase the amount of profit the company will earn. Proctor & Gamble estimates that between 2010 and 2020, the middle class will increase by 1.4 billion people, and 98% of that will come from emerging markets. If that assumption is accurate, then Apple’s next frontier is to sell low-end Apple iPhone products in emerging markets, and to put restrictions on 3rd party markets. Assuming the company is successful at this, then it is highly probable that Apple will sustain earnings growth at the 20.88% rate that analysts have projected for the next five years.
Microsoft is not out-classed
Earlier in the year shares of Microsoft (NASDAQ: MSFT) were sold off because of an IDC estimate that indicated that computer demand declined by 14% for the first quarter. Microsoft made up for this decline in PC shipments with Windows 8 upgrade licenses. This helped to offset the decline in demand. Going forward into 2014, IDC projects, the demand for PC shipments will stabilize at a 1.9% growth rate. Assuming that’s accurate, Microsoft’s desktop and laptop segment will eventually stabilize.
Adding further upside to the company is the potential growth of Windows XP. 40% of small businesses still run on Windows XP. In 2014, Microsoft plans to no longer support the Windows XP operating system, which could force millions of upgrades to Windows 7 or Windows 8.
Microsoft has extended its Office 365 service to iMacs and iPhone devices. This means that Microsoft will capitalize on the rapidly growing Apple user base. I estimate that, by 2017, the Office 365 extension will become a $10 billion a year business opportunity for Microsoft.
Going forward, Microsoft will sustain growth because of product extensions and new products.
Google is always ahead of the curve
Most devices currently use Google (NASDAQ: GOOG) to find content on the internet. Google then collects advertising revenue from search advertising. According to IMS Research, the number of internet connected devices will triple to 28 billion from 10 billion. This means that Google’s addressable advertising market could triple.
Analysts on a consensus basis anticipate the company to grow earnings by 15% on average over the next five years. The company was able to grow search ad revenue by 18% year-over-year in its most recent quarterly release. So the historical data indicates that the company can potentially grow earnings at a 15% growth rate.
IDC projects that the smartphone market will grow at a 25% rate on average until 2016. Based on that statistic, Google’s Android Play Store will grow substantially, making it a compelling investment opportunity going forward.
The company’s mix of products in high-growth industries like search-advertising and smartphones will sustain the company’s growth in the coming decade.
Each company has a growth investment thesis that is slightly different, but all three are likely to work. I believe that digital advertising will grow into the most dominant form of advertising, and Google will be there to profit. Apple’s handset business has substantial upside once it can figure out an effective pricing strategy across all geographic markets. Office 365 on Mac OS X and iOS will be Microsoft’s primary growth catalysts going forward.
I think that if a tech investor wants to earn money from technology stocks, then they should invest into these three companies. The companies are heavily diversified, have a unique growth catalyst, and have been able to historically out-perform the stock market. You can’t ask for more than that.
There's no doubt that Apple is at the center of technology's largest revolution ever, and that longtime shareholders have been handsomely rewarded with over 1,000% gains. However, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.
Alexander Cho has no position in any stocks mentioned. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple, Google, and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!