Some technology trends for investors to consider

Data storage is big, telecom carriers cheap

January 21, 2001|By Pat Dorsey | Pat Dorsey,MORNINGSTAR.COM

Trend-spotting is a dangerous game in the tech sector, which is why you should always be wary of what pundits have to say about "what the future holds." But there's something about a new year that infects me with hubris, so I'm going to give the prognostication thing a whirl.

Trend No. 1 is that data storage will continue to be one of the brightest spots in an otherwise cloudy outlook for corporate spending on information technology.

Although the valuations of the big storage players reflect this rosy outlook in some ways - storage stocks have held up well relative to tech in general over the past several months - I think this is an industry in which the best is yet to come. The usual suspects are probably the best way to play this trend, and I think the odds are good that a basket of EMC, Network Appliance and Veritas will do better than the broader tech market over the next couple of years.

Trend No. 2 is that the better-positioned telecom carriers should have a decent year for a couple of reasons. One is that the stocks are some of the cheapest on the market relative to their growth rates. Yeah, I know that they've been cheap and getting cheaper for a while, but I think the odds are good that said trend has been arrested. Why? The rate cut Jan. 3 has loosened the capital markets, and gaining access to that capital will likely become easier.

In theory, this news should help heavily indebted carriers such as WorldCom and AT&T the most, but I think it will also give a big boost to well-funded companies such as Level Three and Global Crossing. Even though the latter two companies claim to have enough cash on hand to finish the build-out of their networks, looser capital markets give them both a safety cushion should these claims prove wrong.

Think "3G" for Trend No. 3. Although there's been a lot of hype over third-generation, wireless networks, I think the odds are good that the rollout of 3G will be delayed as another set of technologies is put in place and found to be good enough by consumers.

There's an overlay technology called GPRS (general packet radio service) that offers many of the benefits of 3G at a fraction of the 3G cost. GPRS is at least three times faster than most current mobile services and has the same "always-on" capability of a cable-modem, DSL or ethernet connection. This latter point is the most important, since users pay for the data they receive and transmit instead of for the time they spend online. Also, messages can be delivered in real time without users having to dial up to the network and wait for a connection to be established.

In short, the usability of GPRS is a lot better than current services, whereas there's a much smaller incremental benefit to using 3G instead of GPRS.

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