Jim Jubak

Jubak's Journal10/31/2006 12:00 AM ET

Brave new world of tech stocks

Many investors shy away for fear of another crash. But there's a new boom fed by new technologies, though some names -- like Applied Materials -- remain the same.

By Jim Jubak

Hey. I've got a hot investment tip for you for the five years ahead: Buy technology stocks.

Not a chance, you say? Thought so. And the scorn that many investors heap on technology stocks is one reason you should buy. But only if you understand how what's hot and what's not in the technology sector has changed over the past decade.

Today I'm going to show you exactly how much has changed by looking at one company, Applied Materials (AMAT, news, msgs), a sector star in the 1990s that crashed in 2000 but is on its way back to stardom after reinventing itself.

In my next column, I'll step back to take a look at the new trends that are transforming the technology sector as a whole.

Too many investors are paralyzed, like deer in the headlights of an oncoming SUV, by the technology stock crash of 2000. They're focused on the same names -- Intel (INTC, news, msgs) and Cisco Systems (CSCO, news, msgs), for instance. And the same technologies and devices: PCs, microprocessors and routers, to name a few.

Things have changed since 2000

I've got an important message for any investor frozen in that stance: Today's technology sector bears very little resemblance to the technology sector of the 1990s. The opportunities are in new technologies and new devices; silicon for microprocessors has been replaced by silicon for solar panels, for example. And the companies positioned to make the most money for their investors over the next five years are, by and large, not the stars of technology in the 1990s.

It's a new world in technology, and if you want to make money in the sector, you'd better get used to it. And fortunately for anyone who wants to make a lot of money in the sector, the transition from old to new technology isn't a story familiar to very many investors. You can still jump on the trend before the bandwagon -- and stock prices -- have really built up momentum.

Take a look at Applied Materials. The company is a poster child for exactly how much the technology sector has changed.

Once and future king

Way back in 2000, Applied Materials was the 600-pound gorilla of the chip-equipment industry, as dominant in that industry as Cisco Systems was. (Even today, its sales are twice those of its next largest competitor, Tokyo Electron (TOELF, news, msgs).) If you used silicon to make computer chips, you owned equipment made by Applied Materials. Sales climbed to $9.6 billion in the fiscal year that ended in October 2000, a gain of 88% from sales in fiscal 1999. Applied Materials showed net income of $2.1 billion in fiscal 2000.

And then the bottom fell out as chip makers saw their profits vanish and stopped buying new equipment to make chips. By the time sales stopped their plunge in fiscal 2003, Applied Materials' sales had fallen to $4.5 billion, a decline of 53% from the 2000 peak, and net income had turned into a loss of $149 million. (Full disclosure: I know this history so well because I owned Applied Materials, personally and in Jubak's Picks, from April 2000 to June 2001, suffering a 45% loss along the way.)

The shares haven't done much of anything for more than two years, traveling between $15 and $20 a share from August 2004 to the present. The shares traded at $17.68 on Oct. 26.

Huge changes over past two years

But that stagnant stock price doesn't reflect the huge changes at Applied Materials over that two-year-plus period. The company still gets the bulk of its revenue from sales to the chip industry, but management isn't looking to the chip-equipment business, the traditional core of Applied Materials, for the bulk of the company's future growth. As Applied Materials put it in its July 2006 quarterly 10(k) filing with the Securities and Exchange Commission:

"During the third quarter of fiscal 2006, Applied completed certain transactions in support of the Company's long-term growth strategy. Management believes that these transactions will enhance Applied's ability to extend its nano-manufacturing capabilities into adjacent and new markets, including: color filters for flat panel displays, solar energy, flexible electronics, and energy-efficient glass and track solutions for semiconductor manufacturing. These transactions included the acquisition of Applied Films Corporation and the formation of a joint venture with Dainippon Screen Manufacturing (DINRF, news, msgs)."

Flat-panel displays. Solar panels. Energy-efficient glass. All of these have more growth potential, Applied Materials' business strategy says, than the computer chip sector. That's quite a statement coming from the world's leading maker of equipment for semiconductor manufacturing.

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Jubak's Journal

Video: Getting back into technology
Jim Jubak

MSN Money's Senior Markets Editor Jim Jubak explains why the time is right to jump back into the high-tech sector.

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