I went down to Cornwall over the weekend with a group of friends I’ve known since my school days.
I travelled light, not wanting to haul a load of luggage with me for the sake of two nights away.
My mobile phone helped a lot on this score. Once upon a time, I’d have had to pack at least one book and a selection of CDs. Now I had my entire music collection and five or six paperbacks on my iPhone.
My friends were all the same. Every one of them had a smartphone of some sort, with a few Kindles and tablet PCs thrown in.
What did I take from this? Whatever else is going on in the economy, technology that was unthinkably advanced just a few years ago, is now entirely commonplace. The internet revolution that gave rise to dotcom boom and bust is far from over.
So how can you profit from it?
The internet is still transforming old industries
A pall of gloom is hanging over the global economy. And investors are right to be wary, as we discussed on Friday (How to profit as global growth fizzles out).
Everyone is fretting over what will happen when the Federal Reserve stops printing dollars to buy US government debt. And there’s the question of whether or not the Chinese authorities can deliver a soft landing for their economy.
But amid the gloom, it’s easy to forget that life continues. New technology is continuing to transform old industries and our way of living. The music business went through this a long time ago. Now the book publishing industry is scrambling to play catch up as e-reading takes off in a big way.
For many people, a broadband connection is now as indispensable as a television or a washing machine. And with more and more content and products being delivered instantly online, we are going to spend more on devices that connect to the internet.
According to Bolko Hohaus of Lombard Odier, global spending on technology represented 2.3% of world GDP in 1995. Last year it was 4%. It’s still rising. Research firm IDC reckons that 450 million smartphones will be shipped this year, from 303 million last year.
Emerging markets are adapting just as quickly, if not more so. Boston Consulting Group reckons that the number of Chinese internet users will rise from 457 million last year to 750 million by 2015. Its e-commerce market is set to grow from being worth $71bn to $305bn. That would make it the largest in the world, according to The Economist.
A potential takeover target in the fibre optic sector
Of course, sending ebooks, music files, film content and all the rest of it between these devices takes up space. “Global [internet] traffic has increased eightfold over the past five years, and will increase fourfold over the next five years,” according to networking giant Cisco. Much of this will be driven by smartphones and tablets (such as the iPad), rather than traditional PCs.
This is why we think one of the best ways to play the internet boom is by buying companies that can profit from helping companies to deal with all this extra traffic.
Companies like Facebook or LinkedIn may come and go, but the businesses that are responsible for maintaining and controlling the internet’s infrastructure will be necessary regardless of whether it is being used for social networking or online gaming.
MoneyWeek share tipster Paul Hill tipped Cisco as a good play on internet infrastructure recently.
If you’re looking for something riskier, but with more potential for instant gratification, you might consider US stock AboveNet (NYSE: ABVT). The company has drawn some attention from investors in recent weeks amid rumours that it is putting itself up for sale.
The group owns optical fibre networks in several major US cities, including New York and Washington. It is benefitting from growing demand for ‘cloud computing’ services (where computing power and data is stored centrally and bought as needed rather than everyone owning their own computer networks).
“You’ve got this movement right now to cloud computing,” analyst Mark Kelleher tells Bloomberg. “All of this information is being moved out to these data centres. Fibre is the highway. It’s how you get data in and out.”
One of AboveNet’s rivals, Global Crossing, was bought over by another competitor, Level 3 Communications, last month. Yet AboveNet is more profitable than either of its rivals. And analysts reckon any deal should price it accordingly. Kelleher reckons AboveNet could fetch $100 a share compared to the current share price of around $75.
Louis Basenase at InvestmentU also notes that even if a deal does not materialise, AboveNet is a decent stock in any case. It “boasts more cash than debt and is enjoying solid growth, with revenue up 86% over the last five years. Not to mention, the company’s turning a profit, while most of its competitors struggle to do the same.”
Clearly it’s not without risk. But buying into an established, profitable company like AboveNet looks a better bet to us than taking a punt on LinkedIn.
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