Forbes Tech 25: The Unusual Suspects
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The recently announced Forbes list of Fastest Growing Tech Companies of 2013 has familiar names at the top: LinkedIn, Facebook, and Apple.
However, there are some unusual suspects standing out in the rankings, building exciting products for rapidly growing markets. So which are these companies, how are their market and financial prospects, and can they emulate some of their more famous counterparts topping the list?
Fast growth in the future of manufacturing
3D Systems (NYSE: DDD) is a market leader in 3D printers and print material that can be used to build everything from a toy to automotive parts. With a market cap of around $4 billion, the company is part of a $2.2 billion market that is forecasted to grow at a 25-30% rate to more than $10 billion in the next five years.
While Gross Margin currently stands at a healthy 52%, 3D Systems' stock is currently an expensive proposition, as it is trading at almost 12 times its sales.
M&A (merger and acquisition) activity is high in this sector. Competitor Stratasys just completed a $400 million acquisition of MakerBot, while 3D Systems bought Phenix Systems, a French 3D printing company specializing in metal printing. With the company forecasting a 37% growth in sales in the next 12 months, the market is bullish on 3D Systems.
IPG Photonics (NASDAQ: IPGP) ranks #11 in Forbes list of Best Small Companies -- if you can call a $2.6 billion valuation small in the first place. The company is the global No.1 in specialized lasers, called fiber lasers, that are more powerful and efficient than conventional lasers. These lasers have applications in diverse areas like materials processing, telecommunications, and micromachining.
Stock analysts are uniformly positive—the product is disruptive (the fiber lasers segment is growing at 60%), Gross Margins are at 54%, and the company is vertically integrated (unlike many competitors.) IPG’s capacity for growth is fuelled by a $370 million cash chest and the acquisition of West Coast UV laser company Mobius Photonics to accelerate entry into new markets. Most analysts therefore are putting a strong “Buy” on IPG stock, especially because it remains potentially undervalued.
A bright future
With the lights going out on the incandescent light bulb by the January 2014 deadline, the spotlight is firmly shifting on LED lighting makers like Cree (NASDAQ: CREE). Analysts expect the LED lighting market to grow to $25 billion by 2020 from the current $14 billion. Despite falling prices, Cree increased revenues by 14% and profits by 69% last quarter. While Gross Margins have recently stagnated at around 37%, blockbuster products like a $10 LED bulb have led to record sales, and an increase in the stock price by 17%. The company has also made acquisitions, like LED lighting specialist Ruud Lighting, for $525 million.
Cree has strong competition to contend with – Osram (a Siemens subsidiary) and Philips, who are both strong in the North American market, apart from Chinese and Korean competitors. Therefore, analysts expect the pressure on margins to build due to increased marketing expenditure. At the same time, they are switched on about Cree’s expected increase in market share.
Impact of innovation
InvenSense (NYSE: INVN) may be ranked #13 in the $8 billion Micro-electro-mechanical systems (MEMS) market, but it has heavyweights like Bosch and STMicroelectronics in its sights. On cue, the company -- which specializes in motion sensors used for consumer electronics -- has recently delivered scorching growth of 67% in sales and 130% in earnings.
InvenSense has built its success on key differentiators—the unique Nasiri Process (after founder Steve Nasiri) for manufacturing that improves quality while lowering cost, and pioneering products like the world’s first 9-axis motion tracking device. A Gross Margin of 53% underlines the positive impact of such innovation. There are distractions like the high stakes legal battle with STMicroelectronics over patents (both companies have sued each other.) However, with rumors of Apple sourcing from InvenSense for the first time, analysts have more reasons than ever for a strong “Buy” on the stock.
Some concluding thoughts
These success stories come with the standard caveat that all success is relative. Skim through the 2012 Forbes list and you can see red hot favorites like Red Hat and Qlik Technologies no longer able to keep up with the scorching pace. Healthcare has just one survivor, Athenahealth, from last year’s three.
So will the brash new entrants of 2013 become the next Apple, Facebook, or LinkedIn? It's a tough call to make.
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Preetam Kaushik has no position in any stocks mentioned. The Motley Fool recommends 3D Systems and IPG Photonics. The Motley Fool owns shares of 3D Systems and IPG Photonics and has the following options: Short Jan 2014 $36 Calls on 3D Systems and Short Jan 2014 $20 Puts on 3D Systems. 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!