Featuring Lutts’ Logic:
The Wisdom of Craig Barrett and Thomas L. Friedman
The Next Intel
Today’s original column, about the future of political party balance in the U.S., was started last Thursday and nearly finished Friday; my plan was to put the finishing touches on it in a calm period on Sunday and then submit it to our editors/proofreaders on schedule at noon on Monday.
But you’re not going to read that column today.
No, the dog didn’t eat it. And, no, my hard drive didn’t crash. What happened was this: Sunday’s New York Times brought an op-ed piece so spot-on about the future of the U.S. economy that I’m copying it here in its entirety. You’ll have my delayed column on politics in the future, and with luck it will benefit from the aging.
Invent, Invent, Invent
By Thomas L. Friedman
“I was at a conference in St. Petersburg, Russia, a few weeks ago and interviewed Craig Barrett, the former chairman of Intel, about how America should get out of its current economic crisis. His first proposal was
this: Any American kid who wants to get a driver’s license has to finish high school. No diploma – no license. Hey, why would we want to put a kid who can barely add, read or write behind the wheel of a car?
Now what does that have to do with pulling us out of the Great Recession?
A lot. Historically, recessions have been a time when new companies, like Microsoft, get born, and good companies separate themselves from their competition. It makes sense. When times are tight, people look for new, less expensive ways to do old things. Necessity breeds invention.
Therefore, the country that uses this crisis to make its population smarter and more innovative – and endows its people with more tools and basic research to invent new goods and services – is the one that will not just survive but thrive down the road.
We might be able to stimulate our way back to stability, but we can only invent our way back to prosperity. We need everyone at every level to get smarter.
I still believe that America, with its unrivaled freedoms, venture capital industry, research universities and openness to new immigrants has the best assets to be taking advantage of this moment – to out-innovate our competition. But we should be pressing these advantages to the max right now.
Russia, it seems to me, is clearly wasting this crisis. Oil prices rebounded from $30 to $70 a barrel too quickly, so the pressure for Russia to really reform and diversify its economy is off. The struggle for Russia’s post-Communist economic soul – whether it is going to be more OPEC than O.E.C.D., a country that derives more of its wealth from drilling its mines than from tapping its minds – seems to be over for now.
At the St. Petersburg exposition center, showing off the Russian economy, the two biggest display booths belonged to Gazprom, the state-controlled oil and gas company, and Sberbank, Russia’s largest state-owned bank.
Russian companies that actually made things that the world wanted were virtually nonexistent: Two-thirds of Russia’s exports today are oil and gas. Gazprom makes the money, and Sberbank lends it out
As one Western banker put it, when oil is $35 a barrel, Russia “has no choice” but to reform, to diversify its economy and to put in place the rule of law and incentives that would really stimulate small business. But at $70 a barrel, it takes an act of enormous “political will,” which the petro-old K.G.B. alliance that dominates the Kremlin today is unlikely to summon. Too much rule of law and transparency would constrict the ruling clique’s own freedom of maneuver.
China is also courting trouble. Recently – in the name of censoring pornography – China blocked access to Google and demanded that computers sold in China come supplied with an Internet nanny filter called Green Dam Youth Escort, starting July 1. Green Dam can also be used to block politics, not just Playboy. Once you start censoring the Web, you restrict the ability to imagine and innovate. You are telling young Chinese that if they really want to explore, they need to go abroad.
We should be taking advantage. Now is when we should be stapling a green card to the diploma of any foreign student who earns an advanced degree at any U.S. university, and we should be ending all H-1B visa restrictions on knowledge workers who want to come here. They would invent many more jobs than they would supplant. The world’s best brains are on sale. Let’s buy more!
Barrett argues that we should also use this crisis to: 1) require every state to benchmark their education standards against the best in the world, not the state next door; 2) double the budgets for basic scientific research at the National Science Foundation, the Department of Energy and the National Institute of Standards and Technology; 3) lower the corporate tax rate; 4) revamp Sarbanes-Oxley so that it is easier to start a small business; 5) find a cost-effective way to extend health care to every American.
We need to do all we can now to get more brains connected to more capital to spawn more new companies faster. As Jeff Immelt, the chief of General Electric, put it in a speech on Friday, this moment is “an opportunity to turn financial adversity into national advantage, to launch innovations of lasting value to our country.”
Sometimes, I worry, though, that what oil money is to Russia, our ability to print money is to America. Look at the billions we just printed to bail out two dinosaurs: General Motors and Chrysler.
Lately, there has been way too much talk about minting dollars and too little about minting our next Thomas Edison, Bob Noyce, Steve Jobs, Bill Gates, Vint Cerf, Jerry Yang, Marc Andreessen, Sergey Brin, Bill Joy and Larry Page. Adding to that list is the only stimulus that matters.
Otherwise, we’re just Russia with a printing press.”
I couldn’t have said it better myself.
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Intel was once a superb investment. If you had bought $10,000 of INTC at the end of 1974, the year Craig Barrett joined the company (three years after the IPO) you would have had about $18.5 million at the stock’s peak in 2000 … or nearly $4 million today.
But Intel’s glory days are gone; your job today is to find the next Intel.
Ideally, the next Intel is still small, but growing fast. It makes a product or provides a service that is easily scaled up, so that millions, even billions, can be sold. It comes to dominate its industry by erecting barriers, both intellectual and structural, to potential competitors. It has healthy profit margins. And it is unloved by both institutional and individual investors today.
I can think of a number of Chinese companies that meet these characteristics; some I’ve mentioned in the past and more I’ll mention in the future.
But today, following the lead of Craig Barrett and Tom Friedman, I’m sticking to the U.S., so my focus is a little-known company that’s actually just a half-hour’s drive from the Cabot offices.
It’s Starent Networks (STAR), a leading provider of the hardware and software that enable operators of mobile phones to deliver multimedia services to their subscribers.
In brief, these products act as gateways that connect the radio access network (RAN) of the telecommunications company to the Internet Protocol
(IP) network that we refer to as the Internet.
In this regard, Starent is like Intel; in its early days, no one knew Intel, it was just a supplier of chips inside computers sold by IBM, Hewlett Packard and others. The “Intel Inside” ad campaign that made the company a household word didn’t come along until 1992.
Starent’s products sit on the data center shelves of Verizon, AT&T and Sprint, as well as foreign providers (in 40 countries) like Bouygues Telecom and mobilkom austria. You’ll probably never see one.
But if you’ve done anything on your phone beyond simple talk, you’ve probably used Starent’s technology. And you’ll probably use it in the future.
The company has a sterling record of revenue growth–from $34 million in
2004 to $254 million in 2008–and a golden record of earnings growth–from a penny in 2005 to $0.95 in 2008.
STAR has appeared in Cabot Top Ten Report four times this year. In its most recent appearance, on May 18, when the stock was trading at 19, here’s what editor Michael Cintolo wrote:
“Palm will be rolling out the Pre in the next few weeks and Apple is expected to raise the curtain on a new 3.0 version of the iPhone this summer. The various models of BlackBerrys also remain hot. What all of these phones have in common is the ability to deliver multimedia services like video, email, mobile TV and gaming to handheld devices. And Starent Networks is an industry leader in designing and manufacturing the infrastructure hardware and software that delivers the digital goods.
Starent gets 90% of its revenue from the U.S. and Canada, but has operations in Japan, Korea and a few other spots. The company was founded the year the Tech Bubble burst, and has been consistently profitable since it came public in mid-2007. With 3G devices proliferating, the company looks to be in the right business at the right time. We like it.”
Since then, the stock has climbed from 19 to 25. A correction from here to 23 is likely; lower is possible. But the main trend is up, so I recommend buying on any normal pullback.
You can get regular updates on Starent Networks in every issue of Cabot Top Ten Report, our weekly guide to the most profitable stocks in the world. Cabot subscribers who follow Cabot Top Ten Report’s advice have been early buyers of big winners like Apple, Priceline.com, Intuitive Surgical, Baidu.com, Ultra Petroleum, Winn Resorts, Crocs and many more.
To get started with a no-risk trial subscription, click here.
Additionally, to get a dose of Michael Cintolo, live, you can tune in to his Internet Seminar next Thursday, July 9 at noon (EST). Click here for details
Yours in pursuit of wisdom and wealth,
Cabot Wealth Advisory