2011 Themes and Forecast

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Last year I stuck my neck out with “10 Themes and Predictions for 2010” and got quite a few things right.   I did fall short in two areas, though, as I thought we would see substantial new taxes on telecom to assist with huge deficits (it hasn’t happened in the U.S. yet, but notice they are at least discussing this measure overseas:  http://www.cn-c114.net/575/a550527.html ).  I also thought we would see a number of tech mergers, and though I was on the money that this would occur, not one of my candidates was acquired.  I would like to point out that I wasn’t totally wrong about the companies I mentioned; every one of them was undervalued, and though no other company decided to gobble them up, investors sure did.  I bet there are more than a few companies who would have liked to acquire one of these, but now the valuations make it much harder so I’m removing most of them from the likely-to-be-taken-over list. They are no longer undervalued, in my opinion.

Closing Price

Closing Price

Percentage of

Company

Symbol

1/4/2010

12/31/2010

Increase

Adtran ADTN

$22.70

$36.21

59.52%

Fortinet FTNT

$18.00

$32.35

79.72%

Extreme EXTR

$2.90

$3.09

6.55%

Juniper JNPR

$27.18

$36.92

35.84%

F5 FFIV

$53.98

$130.16

141.13%

Riverbed RVBD

$23.85

$35.17

47.46%

Average Return

61.70%

 

This year I will stick my neck out a bit further and get a little more specific with some additional themes and predictions.  I look forward to your feedback.

1)      M&A Continues – Though I mentioned this last year, there are still some really interesting pieces on the board throughout technology in general and in the telecom space.  Most of the companies mentioned below will, in my opinion, either need to acquire someone or be acquired to stay viable.

  • XO –  Icahn tried to take it private a while back and does have majority control. They have some nice assets especially in some of their fiber-rich markets.  The question is what does Icahn want to do with this?
  • Global Crossing – Some of the best international assets and routes are held inside this company.  Keep in mind they have had a ton of financial issues in the past but have had the benefit of bankruptcy to clean some of this up.  On the downside, this company is still losing money and sports a negative book value.  Global Crossing would be a great asset for a number of companies trying to move upstream in the Global Enterprise space.
  • Sprint – After completing what is perhaps one of the worst mergers of all time, the acquisition of Nextel wiped out billions of dollars of equity, added to debt, brought on a string of losses, caused additional customer support problems, destroyed employee morale, diverted investment from other key aspects of their business, and I could go on.  However, you can see that there are improvements being made and even with the $15 billion in debt (if you subtract cash on the books) this company still trades at less than book value.  Given that they are one of the major wireless players, would it really be surprising for the company to be reunited with Embarq at CenturyLink at some point or perhaps acquired by Google (which has been floated a couple of times)?
  • Here are a few more names that I think are likely plays due to growth in the cloud, fiber assets or just ripe for consolidation:  Blue Coat Systems, Tekelec, NTELOS, Skype and MySpace.

2)      Continued Uncertainty – As the recession rolls on (or at least its close cousin, the jobless recovery), it will begin to alter purchasing and business decisions differently even than previous years.  Companies will begin taking gambles they would not have even considered three to five years ago.  As companies are already operating very lean due to the recession, IT and other leadership will be pressed to continue to find ways to cut cost.  This will lead to opportunity for some but also cause many businesses to make risky choices that may not have been thoroughly vetted.

3)      Microsoft Goes Three for Four –  After scoring hits with Kinect and Windows 7 in 2010, Microsoft finally makes inroads on the Telecom side. Though Windows 7 Mobile may be a bust, some studies have shown that up to 30 percent of Enterprises plan to deploy Lync server in some form or fashion.  There are still issues to be addressed but Microsoft appears to have finally gotten many things right.

  • Virtualization supported in Lync Server
  • Requires fewer physical servers (many configurations will need only one server compared to four in OCS 2007)
  • Lync will provide single client instant messaging, web conferencing, presence, voice, voice mail, etc. vs. having separate clients in OCS 2007

4)      Smartphones and Tablets Outsell Notebooks and Desktops – This isn’t the demise  of the desktop as we happen to be in a major upgrade cycle due to Windows 7.  However, phone upgrades are happening at a much more rapid pace than desktops and laptop replacements.  Pricing and ease of use makes smartphones and tablets available to a huge audience.  Almost every manufacturer has added some form of a smartphone to their line ups and there are very few plain phones left that can even be purchased today.  In talking with several customers, I have noted that many executives are planning to purchase large numbers of tablets for their organizations in 2011.  This makes me believe that we will see a slew of mobile computing applications for business on tablets by the end of 2011.  I don’t think there is any doubt why RIM and others are rushing to get their tablets out.  The question is whether they are too late with Apple already having first-mover advantage.

5)      Security – Security will continue to be move up the IT agenda as general socioeconomic strains expose additional needs and requirements.  Mobile security breaches and management will become a major focus.

6)      Compliance – Look for compliance and standards to be a major cloud driver in 2011.  Many players are working as hard as they can to achieve multiple levels as quickly as possible.

7)      New addictions and ailments will be linked to high social media and mobile device usage.

8)      Apple obtains largest market cap of any company in the world during 2011.  How does this happen, even with Exxon potentially having much higher oil as a tailwind?  We’ll see iPad momentum with new models, Verizon and potentially other carriers get the iPhone soon, a continued Mac-Halo Effect and the sleek Mac Air.  You never can discount what Apple might have coming down the pipeline.  Even from a valuation standpoint, when you subtract Apple’s cash from the stock price, you get a very low PEG ratio.

9)      Mobile Photo Sharing – Social media photo sharing gains momentum in 2011 with almost every device coming with a camera. Timing couldn’t be better for applications like Instagram http://instagr.am/.

10)   Crowdsourcing – Continues and gains major momentum crimping traditional agencies and attracting considerable talent from a large talent pool of disenchanted and displaced workers.

Let me know what think will happen in 2011 or if there are any additional technologies that are especially interesting.

In the interest of full disclosure, I do own shares in some of the companies mentioned in this BLOG.

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