(Money Magazine) -- Technology trends can be easy to spot -- iPod earbuds become ubiquitous, people casually use the term "Google" as a verb. But if the decade since the Internet bubble burst taught you anything, it's that tech investing is hard. The key is to find companies that can take advantage of massive shifts in the way consumers and businesses use technology.
In the 1990s the rise of the personal computer translated into huge gains for Intel (INTC, Fortune 500) and Microsoft (MSFT, Fortune 500), which positioned their processors and software as essential components of virtually every PC sold. Dell (DELL, Fortune 500), which found a more efficient way to make and sell computers, also saw its stock soar. Those companies -- along with Cisco Systems (CSCO, Fortune 500) -- came to be known as the Four Horsemen of Tech. But by 2000, PCs ceased being a torrid growth story.
Fortunately, "there are plenty of new themes in technology," says Bob Turner, chairman of Turner Investment Partners. If you're willing to bet on a firm that may (or may not) turn out to be the next Google, take a closer look at the following trends.
But be careful. Many stocks that look attractive are shares of small companies that are quite volatile. If you have the stomach for it, read on.
Ask any corporate technology executive: The wave of the future is software delivered over the Internet rather than installed on company-owned desktops and servers. Businesses like this model because they don't have to invest in data centers, and they can buy or cancel services as they add or subtract employees.
While IBM (IBM, Fortune 500), Microsoft, and Oracle (ORCL, Fortune 500) are all looking for ways to deliver software via the web, smaller outfits are successfully applying this model to specific corporate functions.
SuccessFactors (SFSF), for instance, helps companies conduct employee-performance appraisals online. The San Mateo, Calif., firm is also working on "business execution software" that marries its performance technology with tools that help workers meet their strategic goals. Be careful, though: With a market value of just $1.1 billion, this small-cap stock isn't for the faint of heart.
Health care is another big growth area for on-demand software. Information technology has tried for decades, with little success, to penetrate doctor's offices and hospitals; the providers have always cited cost as a deterrent. But the U.S. health-care system is about to go digital, thanks to $45 billion in federal funds for health information technology.
One firm that stands to benefit is AthenaHealth (ATHN), a small-cap company that sells on-demand software to physicians to automate billing and payment. Athena trades at 45 times forward earnings, making it a fairly rich stock. But the firm focuses on doctors' practices, a challenging but vast market: There are some 230,000 practices in the U.S., and competitors such as GE (GE, Fortune 500) and McKesson (MCK, Fortune 500) may not have the inclination to knock on all those doors.
Seattle-based F5 Networks (FFIV), which sells bundled hardware and software that speed up the delivery of web-based applications, is already a leader in the on-demand field. Clients include eight of the top nine on-demand software providers. Despite the recession, F5 boosted profits 23% in fiscal 2009.
The best reason to own shares of Apple (AAPL, Fortune 500) may be the iPhone. With 18% of the global smartphone market, Apple has built a mobile-computing platform that aims to do for phones what Microsoft's Windows did for the desktop.
Yes, the stock is pricey. But earnings are projected to grow more than 19% annually for the next five years.
If you believe smartphones represent the future of computer technology, another firm that deserves a look is Broadcom (BRCM, Fortune 500), whose microchips have found their way into the newest iPhones.
While Intel, which became a behemoth in the PC era by cramming its chips into as many computers as possible, is trying to expand into mobile devices, Broadcom has already staked out a leading position in the wireless world. Its chips enable phones to connect to local wireless networks, play videos, and offer GPS navigation.
Analysts believe Broadcom will be able to boost its earnings by 16% each year over the next five, outpacing the broader market.
From home videos to e-mails to employee records, we're generating astounding amounts of data. So companies that can store, manage, and make sense of that data -- such as Google (GOOG, Fortune 500), which converts online searches into a platform for advertisers -- will be sitting pretty.
Smaller firms are poised to profit on data overload too. Informatica (INFA) helps large companies sort and view the vast streams of information that come pouring in from employees, customers, and suppliers.
Despite the recession, Informatica has been on a tear lately, with third-quarter earnings up 26% vs. a year ago. Its shares, though, are near 52-week highs, so you might want to wait for a dip to buy.
CommVault (CVLT) is another play on data glut, though with a market cap of less than $1 billion, it's a risky one. Think of CommVault as an arms dealer to firms grappling with how to secure -- and ultimately use -- the data their businesses throw off.
At a 27 P/E ratio, the stock is expensive, but analysts expect the company's earnings to grow 17% annually for the next five years, while the S&P 500 is projected to grow just 11% a year during that time.
If our environmental future is going to rely more and more on renewable energy, and our cars are increasingly going to run on electricity, our wheezing electrical grid will need to be upgraded as well.
A big problem utilities face is an inability to predict demand. Enter EnerNOC (ENOC). This small Boston firm has developed software that sits between utilities and customers who have agreed to cut back on non-essential energy use during peak periods in exchange for payment. With this "demand response" system, utilities get the power they need to make it through peak emergencies.
More than 2,500 outfits, from state governments to grocery stores to steel plants, have signed up, effectively putting 3,250 megawatts of power under EnerNOC's control.
The stock has been soaring as of late, tripling in value since scraping lows in November 2008. Still, it trades far below the $50 price it hit in December 2007. And analysts believe the firm's earnings are poised to grow 33% for the next five years, suggesting the stock has a lot of room to run.
Kyle Bass is the founder and chief investment officer of Hayman Capital Management. More
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