What Makes You Say, “Wow!”

What Makes You Say, “Wow!”

Next Big Things

A Revolutionary Chinese Stock

Back in 1965, Gordon Moore (then working at Fairchild Semiconductor, but soon to help found Intel) published an article called “Cramming More Components Into Integrated Circuits” in Electronics magazine. Moore predicted that the number of transistors on computer chips would double about every 18 months. Although he later amended the time scale for what would become known as Moore’s Law to every two years, it has remained The Law for 48 years. To put it in concrete terms, when Moore published his paper, the most advanced chips contained about 60 devices, while Intel’s hottest new chip, the 62-core Xeon Phi, boasts about 5 billion (with a “B”) transistors.

You can thank Moore’s Law for your GPS-capable, picture-taking, video downloading smartphone, your kids’ tablet computer that plays 3-D video games and a host of other chock-full-of-chips devices. You can also see it as the basis for the growth of the computer industry; if a device with double the power is going to be available in a couple of years, you’re going to need to trade in your old clunker for a new one a lot sooner than you’d like.

Moore has also noted that similar advances aren’t really possible in other industries. If carmakers had been making parallel strides, cars would get 100,000 miles to the gallon and you could buy a Rolls Royce for less than a Starbucks latté. Unfortunately, cars would also be about a half an inch long.

Chip designers say that they can obey Moore’s Law for a few more years, but then they’re going to run into some resistance from another set of laws, the laws of physics. Increasing chip density means that smaller chips with more devices will generate more heat but have less surface area to get rid of it. And if the infinitesimal circuits on chips continue to shrink, the thickness of the materials separating them will be so thin that electrons will start leaking through the boundaries!

Of course scientists are working on new ideas for processors and data storage and software. But the computer/handheld-device industry is built around Moore’s Law and the rapid turnover that it dictates. Spectacular advances in integrated circuits are so commonplace that the tech sector takes miracles for granted and expects consumers to throw out last year’s machines with the trash.

One concrete manifestation of The Law is the rumored Apple iWatch, a device that will shrink enormous functionality down to a size that makes the Dick Tracy wrist TV seem like mundane reality, not a science-fiction speculation.

But the shrinking of enormous computing power from rooms full of glowing vacuum tubes to a device that doesn’t even bulge your pocket is reaching its own limit. Display screens have to be a certain size just to remain visible. (I’m not going to get into the retinal projection technology of Google Glass.)

It seems that computing devices, in all their telephoning, music playing, texting, Facebooking, book displaying, movie showing, YouTube streaming glory are near the end of the process. When you have the Internet, an address book, a clock, a radio, a library, a phone (with Yellow Pages), a TV, a movie theater, a record collection, a game console, a personal concierge and all your magazine subscriptions all in one device, there’s not much left to add.

Small-Cap

If Moore’s Law is going to lose traction, where will The Next Big Thing come from? The bumper stickers that you see in Silicon Valley that say “Please, God, Just One More Bubble” could go on the bumpers of lots of investors, too. The global recession and the surprisingly robust recovery in the stock market that followed seem to be at a crux, and nobody knows where things will go from here. This leaves stock investors looking for the companies that are ready to take the elevator, not the stairs.

I don’t have any more idea than you do of what The Next Big Thing is. After all, one of the main characteristics of The Next Big Thing is that it won’t fit in with The Way Things Are Today. Every big advance (cars, telephones, record players, radio, TV, Sony’s Walkman, the Internet, iPads) seemed silly at first, then like a threat, and then like a natural part of everyday life.

But the real opportunity for investors comes to those who see the potential while the device or technology still seems silly. It takes a lot of confidence, a lot of optimism and a real taste for risk to sign on with a new company before the market confirms the wisdom of the buy.

All I can do is to keep my eyes open, watch which stocks (especially the ones that represent potentially revolutionary technologies) are making great gains and identify the familiar patterns of technical growth, momentum and support. By staying out of the business of predicting what the winners will be, I can make the most accurate description and analysis of what’s actually happening. It’s the essence of what Cabot growth advisories have been doing for many years, and it pays off.

The one Cabot advisory that routinely aims to find revolutionary stocks before they’re recognized by the market is Cabot Small-Cap Confidential. The editor, Tom Garrity, is a research junkie (his words) and he finds small companies with compelling technological advantages in medicine, energy, even food production.

These companies are not widely known, but Tom’s recommendations have a long investment horizon. And his predictions that the market will eventually catch on to the value of the innovations he uncovers have proven highly profitable.

Just to be contrary, my stock pick for today is as close to revolutionary as I can think of. It’s a Chinese stock that’s like a combination of Facebook (for the social media aspect) and YouTube (for the sharing of videos element). YY Inc. (YY) operates a social platform that allows users to share videos, which is pretty standard. But YY’s use of those videos (many of which are karaoke performances of popular songs) verges on revolutionary.

YY takes two videos of the same karaoke song and lets viewers rate which one they like better. This competitive aspect makes for compelling viewing and encourages a high level of viewer participation.

The YY platform (which uses a cartoon raccoon in a blue jacket as a mascot) gets about half of its revenue from online games, with a little over a quarter coming from advertising and the rest from music and other services. Revenue growth has been breathtaking, 158% in 2011 and 159% in 2012, and 134% in Q1 and 126% in Q2 of this year. EPS went from four cents in 2011 to 57 cents in 2012 and estimates are for $1.14 in 2013.

YY came public in November 2012 at 11 and surged to 20 in February, then 30 in May. The stock really caught fire in July, ripping to 44 at the end of the month. It has been consolidating its gains and building a new base with support at 40 for a little over three weeks.

Making unique use of a common commodity is a revolutionary act, and YY Inc.’s use of user-generated content to create competitive excitement is bringing great results for this ambitious Chinese company.

Sincerely,

Paul Goodwin
Editor of Cabot China & Emerging Markets Report
and Cabot Wealth Advisory

Comments