Technology moves at an enormous speed. Powerful trends can develop quickly – sweeping away established ways of doing things in a matter of months. And it can be tricky to get on the right side of these moves before they take off.
First, you have to contend with the jargon. Technology has a language of its own, making it sometimes hard to comprehend. The industry is fiercely competitive. And, in the case for instance of semi-conductor manufacture, it can require huge investments of capital which will not necessarily yield an economic return.
In spite of these difficulties, this is an area of the stock market that can yield enormous returns. Companies like Aple, Microsoft and Ebay have made fortunes for their early backers, and this success has not been confined to the USA.
Here in the UK, the likes of Imagination Technologies (IMG), Arm Holdings (ARM), Autonomy (AU.) and translation software specialist SDL (SDL) are all proof that Britain is no back marker in the technological revolution.
And there are a host of other tech markets that are enjoying seismic growth. Take mobile phones: as mobile devices become smaller, smarter and easier to use, and as broadband connectivity spreads its tentacles further around the world, a virtuous circle is being created in which internet access simultaneously becomes of better quality and available to all.
Smartphone sales are growing at 40% per annum, and, while it took 74 days to sell the first one million iPhones, the first one million iPads were snapped up in just 28 days. On-the-move internet connectivity is a megatrend.
And I can think of at least three other major trends that could produce outstanding penny share opportunities in the year or so ahead.
Three megatrends you need to keep an eye on
Cloud Computing
Most of us have a PC under our desk, whirring away and crunching data – in other words, computing. But given a reliable broadband link there is no reason why this should not be done in some large data centre many miles away with just the results returned to our desktop.
Cloud computing relieves users of the need to house expensive hardware. Pay-per-use models can cut computing costs. And the files stored in the cloud, unlike those stored on your PC, can be accessed from any connected device anywhere.
One company now offering to take over an entire corporate IT department and deliver it from the cloud is K3 Business Technology Group (KBT). When presenting excellent annual results last week, chief executive Andy Makeham said that he was “staggered at the response” to this offer, and described several significant contracts that K3 has already signed. Trading on just six times forecast earnings, shares in this cash generative, dividend paying business look undervalued.
Claim your special FREE report: 10 simple rules for maximising your penny share profits
- Receive the stock market wisdom of a top-level penny share expert
- Your essential guide to playing the small caps market
Mobile Commerce
This is a huge growth area. It starts with the adaptation of web pages for viewing on a pocket-sized screen, and includes mobile advertising that can be linked to GPS position-finding devices, and secure payment.
According to Alastair Lukies, the chief executive of Monitise (MONI), “financial institutions in the UK and North America now see mobile banking as strategically critical”. Monitise has created mobile money networks that allow customers of different banks and mobile operators to perform banking and payment transactions directly from their mobile handset.
Monitise is adding 100,000 registered users per month and has a long term agreement with Visa. The City is clearly expecting big things. Monitise’s stock market value is £155m, compared to last year’s revenue of just £6m. Although Monitise may be an exception, as a rule I don’t think you get rich by investing in companies valued at 25 times sales, so this one is not for me.
Optoelectronics
Optical fibre cables have routinely been used to transmit large amounts of data over long distances. But once this data gets into your home, or into a device, it is still transmitted by copper wire. This is about to change.
The industry is now set to replace all those copper cables and connections with optical fibre, in a phenomenon known as ‘light peak’. This could improve connectivity speeds by 10-100 times and is, according to Intel, a “logical future successor to USB”.
This view is endorsed by other industry giants. Sony’s vice president, Ryosuke Akahane, talks of “a new generation of high-speed device connectivity” while Markku Verkama of Nokia says that “light peak technology will enable new wired connectivity solutions for mobile computers and smartphones”. The key enabling material for this is gallium nitride, and a key supplier of compound semi-conductor wafers that include gallium nitride is Cardiff-based IQE (IQE).
Excitement over IQE’s prospects has seen its share price double since June. Investors perceive it to be on the right side of one of today’s technology trends. And there are others. Riding the wave of technological change can be highly rewarding.
• This article was first published in Tom Bulford’s twice-weekly small-cap investment email
Claim your special FREE report: 10 simple rules for maximising your penny share profits