Great Internet `Picks and Shovels' - stocks of technology companies - Brief Article

Kiplinger's Personal Finance Magazine, Nov, 1999 by Steven T. Goldberg

Few miners got rich during the California gold rush, but a lot of businessmen did, selling picks, shovels and other supplies to those miners. That hoary tale is worth remembering when investing in the Internet. While most of the attention is focused on popular Web sites--Amazon.com, eBay, and the like--investors might do well to consider the companies providing the picks and shovels.

"Think of it this way," says Kevin Landis, co-manager of Firsthand Technology Leaders fund. "You don't, need to be right about who is going to become the dominant online-auction site if you're just betting there will be a lot of traffic associated with on-line auctions." It's a sure thing, says Landis, that the Internet will keep getting busier. "If there were a stock out there called Internet Traffic, that would be the one we'd own."

Landis owns PMC-Sierra (symbol PMCS, Nasdaq, recent price $100), which makes computer chips used in equipment that directs Internet traffic. The consensus of analysts is that PMC-Sierra will earn $1.20 per share in 2000, according to Zacks Investment Research. The stock is selling at 83 times earnings.

Analysts project that PMC-Sierra's earnings will grow at an annualized 37% over the next five years. While the company has competitors, its chips have "a very rich intellectual-property content," Landis says. "It's going to be very, very difficult for anyone to catch up with them."

Landis is also a big fan of Cisco Systems (CSCO, Nasdaq, $71), the world leader in Internet networking equipment. "It's hard to argue that there's a better company today," he says. Cisco sells at 72 times consensus earnings of 98 cents per share for the fiscal year ending in mid 2000. It's expected to grow at an annualized 30% over the next five years.

Brian Hayward, manager of Invesco Telecommunications fund, likes MCI WorldCom (WCOM, Nasdaq, $82). Much of the Internet's traffic travels over MCI WorldCom's UUNet. "When you're on the Internet, there's a very good chance you're on UUNet," Hayward says.

In addition to UUNet, Hayward likes MCI WorldCom because it's the furthest along of any company toward building "the holy grail"--a wholly owned, high-speed network connecting phone, cable TV and the Internet to business and residential customers. Hayward thinks that the stock's price is artificially depressed because of a price war among long-distance carriers. It sells at 29 times consensus 2000 earnings of $2.85 per share. Analysts expect earnings to grow at an annualized 32% rate over the next five years, according to Zacks.

Among small and medium-size businesses and residential customers seeking high-speed access to the Internet, DSL (or digital subscriber line) is all the rage. The technology turbo-charges existing copper wires, allowing them to operate at much higher speeds. Raiford Garrabrant, co-manager of Van Wagoner MicroCap, likes Copper Mountain Networks (CMTN, Nasdaq, $83), one of the leading providers of this technology, which gives phone companies a way to compete with cable modems.

CMTN is expected to earn 56 cents per share next year, which means it sells at 148 times earnings. Garrabrant is undeterred: "It's going to grow really fast for the foreseeable future." Analysts estimate the company's earnings will rise at an annualized 43% over the next five years.

Garrabrant also recommends another, even riskier stock, Phone.com, which sells technology that enables wireless devices, such as cellular telephones and hand-held computers, to access the Internet. Phone.com (PHCM, Nasdaq, $136) is expected to lose $1.10 per share for the fiscal year ending next June, and 71 cents the following fiscal year. But over the next five years, analysts predict revenues will grow at an annualized 55%. "The numbers don't tell you a lot because it's such an early-stage situation," Garrabrant says.

Phone.com gets a fee whenever a cell-phone customer accesses the Internet for the first time using its technology. With the number of cellphone subscribers expected to continue growing exponentially, Garrabrant views the company as a great buy.