Something Small, Something Blue

IBM's (NYSE: IBM  ) stock has shed over 16% of its value in April. It's hard to feel bullish about the company now, although investors can take some small consolation in the fact that most competitors -- Hewlett-Packard (NYSE: HPQ  ) , Intel (Nasdaq: INTC  ) , Advanced Micro Devices (NYSE: AMD  ) , and Sun Microsystems (Nasdaq: SUNW  ) -- haven't exactly been lighting it up either as higher interest rates have caused customers to delay purchases and poor semiconductor sales have acted as a drag on the whole sector.

Yet there is reason to be optimistic about IBM's future prospects. To understand, investors need to think long term and think small. Specifically, investors need to appreciate how IBM's research and development in the emerging field of nanotechnology is positioning the company for better days ahead.

According to Lux Research -- a leading nanotechnology research firm -- nanotechnology is expected to account for $2.6 trillion in new products and services within a decade. IBM, by virtue of its $6 billion annual R&D budget, its slew of state-of-the-art research labs, and its team of world-class scientists, already has over 700 nanotechnology-related patents to its credit and is well-positioned to continue to press this competitive advantage in this promising field.

One of IBM's more promising near-term technologies is its Millipede data storage technology. The device -- which works on a principle similar to those old data punch cards that those of us who are 40 or older used in the 1970s -- employs atomic-sized tips to create pits about 10 nanometers wide that are then read as bits of data. This technique will allow a device the size of a postage stamp to hold the equivalent of 25 DVDs. If IBM can bring the technology to market in 2006 or 2007, as expected, it could represent a new way to store massive amounts of data and fuel wide-scale use in next-generation cell phones, digital cameras, and PDAs.

In the realm of computer-chip manufacturing, where IBM is competing with the likes of Intel, Infineon (NYSE: IFX  ) , and Advanced Micro Devices, the push to extend Moore's Law -- which states that the number of transistors capable of being placed on a circuit doubles every 12 to 18 months -- increasingly relies on advances in nanotechnology. And IBM appears to have a workable strategy down to 20 nanometers and, perhaps, beyond.

No doubt, if the 1965 classic The Graduate were to receive a 2005 update, Dustin Hoffman's character would be given the advice that the one word to remember is no longer plastics, but nanotechnology. IBM's work in the field of material science and semiconductors explains why.

Big Blue has already developed a new type of strained germanium that is more conductive than silicon and is being used to improve the performance of existing chips by as much as 35%. The new nanomaterial is one of the driving forces behind the increase in low-cost, lightweight personal communication devices capable of operating at extremely high frequencies.

Another area where Big Blue is making serious inroads using new high-performance nanomaterials is for the creation of smaller, cheaper, and better radio frequency identification (RFID) tags and distributed nanosensors. As Wal-Mart (NYSE: WMT  ) , Gillette, and the Department of Defense continue their pushes to utilize these small sensors, it could represent a new growth area for Big Blue.

On the horizon, IBM researchers have created a self-assembling template that company officials believe may represent a relatively low-cost method of constructing computer circuits down to the 20-nanometer range.

For the longer term, the company is pursuing the development of carbon nanotubes for creating the first nanotube-based logic circuit -- an advance that could extend Moore's Law a few more generations and enable dramatically improved circuits and data storage devices.

In addition to these advances, IBM is harnessing nanotechnology to push the envelope in a variety of other fields, including nanophotonics. It is exploring how carbon nanotubes' ability to absorb and emit light could lead to advancements in fiberoptic technology -- including radically faster bandwidths. And its partnership with Stanford University to create the Spintronic Science and Applications Center is aimed at establishing the company as a leader in spintronics -- using the spin of electrons to store data -- and could lead to a significant increase in the density of hard disks.

Company researchers have also achieved breakthroughs in nanoscale magnetic resonance imaging (MRI). This makes the three-dimensional imaging of molecules a real possibility and will lead to a much better understanding of biological structures. It will also continue Big Blue's foray into the life sciences -- a high-margin business.

IBM has a history of using technology to expand existing markets and create new ones. The convergence of voice, data, image, and video technology is going to bring a slew of new market opportunities, and IBM, by virtue of developing smaller and more powerful RFID tags, computer circuits, data storage devices, and new bandwidth and imaging technologies, has a great opportunity to not only ride -- but to continue to create -- the next great wave of technological innovation.

Moreover, by focusing on the development of new consumer-focused, nanotechnology-enabled products, it could well usher in a new era of cross-selling opportunities for IBM's service consultants.

So if you're still feeling blue about IBM's prospects, I suggest that you just paraphrase that old piece of pre-marriage advice about "something old, something new; something borrowed, something blue." The something old is data punch card technology. The something new is Millipede. Nanotechnology is something small. The something blue, of course, is Big Blue.

Want to read more about IBM or nanotechnology? Check out:

To discuss nanotechnology with other Fools, take a gander at our Nanotechnology discussion board.

Fool contributor Jack Uldrich has been accused by teachers and friends alike of thinking small since grade school. He is the author of The Next Big Thing Is Really Small: How Nanotechnology Will Change the Future of Your Business. He owns shares of IBM only through his various mutual fund holdings. The Motley Fool is investors writing for investors.


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