4 tech trends to watch

Tech investing is all about the next big thing. Here are the trends that could really pay off.

By Michael V. Copeland, senior writer

(Fortune Magazine) -- Technology trends can be easy to spot -- iPod earbuds become ubiquitous, people casually use the term "Google" as a verb -- but technology investing is hard. For every Apple and Google, there are plenty of tech companies that fail to turn their innovations into top-performing stocks.

So how to pick the winners?

The key is to find the companies best positioned to execute on massive shifts in the way consumers and businesses use technology.

In the 1990s the rise of the personal computer translated into huge gains for companies like Intel (INTC, Fortune 500) and Microsoft (MSFT, Fortune 500), which had smartly positioned their processors and software, respectively, as essential components of virtually every PC sold. Dell (DELL, Fortune 500), which found a more efficient way to manufacture and distribute machines, saw its stock soar: A $1,000 investment in PC maker Dell in 1990, held until the end of 1999, was worth some $890,000.

By 2000, PCs had ceased to be a torrid growth story; the next hot technologies revolved around the Internet and the digitization of music, photos, and videos. Shares of Western Digital (WDC, Fortune 500), which makes hard drives to store data, soared 887% in the past decade. And no company exploited the pervasiveness of the Internet quite like Google (GOOG, Fortune 500), whose shares have climbed sevenfold since its IPO in 2004.

Many tech names are trading at or near their 52-week highs, so if you're considering investing in the sector, you'll need to be careful about when you buy, even if you're a long-term investor.

And betting on technology shifts isn't for the faint-hearted: Many of the companies pushing new ideas are startups whose stock performance can be volatile or whose innovations can be replicated by bigger, established tech giants.

But if you're willing to take a risk on a company that may (or may not) turn out to be the next Dell, Google, or Apple, take a closer look at the following tech trends for the next 10 years - and nine companies that stand to benefit hugely.

On-demand software

Ask any corporate technology executive: The wave of the future is software delivered over the Internet (think web-mail services like Google's Gmail) rather than applications that are installed locally on company-owned desktops and servers.

Tech staffs (and finance chiefs) like "software as a service" because they don't have to invest in massive data centers, and they can buy -- or cancel -- the service when they add or subtract employees.

Salesforce.com pioneered the model (see "Ten Best Stocks for 2010"), but others, including IBM, Microsoft, and even Oracle, are also looking at ways to deliver software via the web. Smaller companies, too, are applying the software-as-a-service model to specific corporate functions.

SuccessFactors (SFSF), based in San Mateo, Calif., helps companies conduct employee-performance appraisals and assess employee goals online. Since going public in November 2007, the stock has been all over the map as the company faced operating losses and the impact of the recession. More recently, though, it has found a following with customers, and its shares have soared 185% so far this year.

SuccessFactors is pursuing an additional opportunity in an area called "business execution software," a new set of applications that marries its existing employee-performance software with tools that help workers meet overall strategic goals.

The company believes that this additional software offering will increase its addressable market to $36 billion worldwide, from $16 billion today. If the service can help companies lower costs while getting employees to execute better, SuccessFactors could surpass the earnings growth estimates the Street has for it.

Health care is another huge 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. The U.S. health-care system is about to go digital, though, thanks to $45 billion in federal funds earmarked for health information technology.

One company that stands to benefit is AthenaHealth (ATHN), which sells physicians on-demand software to automate billing and payment. Athena, which went public in September 2007, now trades at 44 times forward earnings, making it a fairly rich stock.

But Athena wisely focuses on doctors' practices, a difficult, diffuse market to reach, but one that is vast: There are some 230,000 practices in the U.S., and giants such as GE and McKesson may not have the inclination or resources to knock on all those doors.

Another company poised to benefit from the software-as-a-service trend is Seattle-based F5 Networks (FFIV). F5 sells bundled hardware and software that speed up the delivery of web-based applications. Clients include eight of the top nine on-demand software providers. Despite the recession, F5 increased its market share and boosted net income 23% in fiscal 2009. And should the economy remain rough, F5 is sitting on a nice cushion of $317 million in cash.

The rise of the smartphone

There are a variety of reasons to look hard at investing in Apple (AAPL, Fortune 500), but perhaps the best rationale to own the stock going forward is the iPhone. Even as sales of traditional handsets slow, those of smartphones that can access the Internet continue to rise.

Thanks to an aggressive expansion into international markets, Apple now has 18% of the global market share in these high-end devices (behind Nokia and BlackBerry maker Research in Motion), up from 14% in the second quarter of 2009. And Apple is just getting started.

Apple has built a mobile-computing platform that aims to do for phones what Microsoft's Windows operating system did for the desktop. Yes, Apple stock is pricey, but its earnings are projected to grow 19.7% a year for the next five years. And remember, Apple, which also makes personal computers and music players, has a way of blowing past estimates.

Intel, which became a behemoth during the PC era by cramming its microchips into as many computers as possible, would like to expand into the mobile devices, but another company, Broadcom (BRCM, Fortune 500), already has a strong position in the wireless world: Its chips enable phones to connect to local wireless networks (Wi-Fi and Bluetooth), play videos, and offer GPS navigation capability. Analysts expect that Broadcom will boost earnings by 16% each year over the next five, outpacing the earnings growth of the broader market.

Indeed, Broadcom chips have found their way into the newest iPhones. If you believe that smartphones represent the future of computer technology, Broadcom is worth a close look.

Data, data, everywhere

Consumers and businesses are constantly generating astounding amounts of data, from home videos to corporate e-mail and employee records. The companies that can capture, store, manage, and make sense of that growing volume of data are going to be sitting pretty in the coming decade. Google (GOOG, Fortune 500), which converts online information searches into a platform for advertisers, is clearly the biggest and best example of a company taking advantage of the trend.

But other companies are poised to make money on data overload. Informatica (INFA) helps large corporate customers sort and view the vast streams of information that come pouring in from their employees, customers, and suppliers.

The software company, based in Redwood City, Calif., sells a data-integration service that organizes information across multiple corporate applications. It could, for example, sync the sales staff's web-based information about their sales activity with internal customer-management software to help managers figure out which customers are consistently securing the biggest discounts.

Even in the midst of the recession, Informatica has been on tear lately, with trailing 12-month revenue of $474 million, up more than 6% from a year earlier. Third-quarter earnings rose 26% year over year.

All that growth, combined with very little debt and an estimated top-line sales growth of around 12% in 2010, has not gone unnoticed by investors (or potential acquirers, like Oracle, Cisco, and IBM). Like much of tech, Informatica shares are trading near 52-week highs, so you might want to wait for a dip to buy. When you do, hold on to it, because the problem that Informatica addresses is only getting worse.

CommVault (CVLT) is another way to capitalize on data glut. Like Informatica, CommVault is an arms dealer to companies grappling with the problem of how to secure -- and ultimately use -- all the data their businesses throw off, whether for strategic reasons or compliance regulations.

Trading at 28 times earnings, 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 the same period. The company today holds its own against larger rivals, but analysts say CommVault is a prime acquisition target for a big tech outfit.

Electricity gets smart

If our environmental future is going to rely more and more on renewable energy from solar and wind, and our cars are increasingly going to run on electricity, our wheezing electric grid will need to be upgraded as well.

Without a smarter grid, none of that other stuff works, because the grid doesn't have the interactive computerized capabilities needed to monitor and balance all that activity. One of the chief problems utilities face with today's grid is an inability to predict demand. When demand spikes, an overloaded system may fail, sending everyone into darkness. And energy prices are also likely to jump.

Boston-based EnerNOC (ENOC) has developed software that sits between utilities and energy customers who have signed agreements to throttle back on nonessential 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, and power users get paid for their help. As of November, more than 2,500 outfits, from state governments to grocery stores to steel plants, had signed up with EnerNOC, effectively putting 3,250 megawatts of power under its management. The company turned a profit of $27 million in the third quarter, its first profitable period since it was founded in 2001, with revenue for the quarter more than doubling to $103 million.

The company's share price has been soaring of late, tripling in value since last November's lows. Still, the stock trades far below the $50 a share it hit in December 2007, not long after its IPO; analysts believe its earnings are poised to grow 33% for the next five years, suggesting the stock has a lot of room to run.  To top of page

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