Make Millions in Tech

Silicon Valley is its own world ("the Valley"), with its own language (geek speak), and its own commerce (ludicrous options grants). That's why many people I know would rather try to eat a gallon of soup with a fork than invest in tech stocks.

But forsaking all tech stocks can be a recipe for subpar returns. Consider Cisco Systems. This tech pioneer, which specializes in the once-esoteric business of networking equipment, delivered mind-blowing returns for early investors. You could have become one of the winners had you done some homework.

Yes, you could have
What homework? Trade magazines such as Network World were a great source of information when tech investments were taking off. Had you been a reader of that particular publication in 1994, you would have learned that Cisco products were helping build the digital communications backbone of the Canadian government. In 1996, you would have learned that Ryder was depending on a Cisco-powered network to keep its trucks in top working condition. And in 1997, you would have learned that Cisco employees loved their jobs so much that they were happily working 60 or more hours per week.

At the same time, had you checked Cisco's annual reports, you would have seen outrageous sales growth:

Investors who seized the momentum in 1994 have seen their original positions increase more than nine times in value. But those who waited till January 1997 are sitting on a better than 280% gain today, which is more than double the market's return over the same time frame.

What about today?
It's tempting to say that the dot-com bubble was a unique time of massive growth and that those days are gone, never to return. But I think that's crazy. Plenty of great tech stocks are available today, and some even look like Cisco did in 1995.

How to find them? Try the same trade magazines that worked back in the day. What you're looking for are technologies that corporate chief information officers are willing to spend big money on. A quick search of "spending priorities" at trade magazine eWEEK brought forth this article, which suggests that service-oriented architectures and software as a service are still in demand.

Screening for opportunities in these related industries isn't too difficult. Here's a list of candidates ranked by three-year sales growth.

Could any of these help you make millions from thousands? Sure. Despite single-digit growth in recent years, IBM appears reasonably valued. It's a powerhouse in software and produces billions in free cash flow. Accenture, meanwhile, remains a world leader in consulting, with a reputation for creating breakthroughs for its clients.

But I'm most interested in WebSideStory. It has many of the attributes I look for in a potential Rule Breaker. There's high growth, of course. But there's insider ownership (more than 7% as I write), enormous market skepticism (roughly 16% of the available shares are sold short), and healthy free cash flow ($7.1 million over the trailing 12 months).

A sound business model also matters. For WebSideStory, it helps customers better manage and measure their websites. While this is a competitive industry, it's also one that is growing in importance as dot-coms focus less on story and more on substance.

Make millions in tech
Learning about the technology industry isn't easy, but the rewards of study can be huge. That's why we devote significant time and energy searching for those opportunities at our Motley Fool Rule Breakers growth-stock newsletter service. We think hunting for the next big technological breakthroughs will lead to the highest possible returns.

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This article was originally published on July 15, 2006. It has been updated.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this story at the time of publication. Accenture is a Motley Fool Inside Value pick. The Motley Fool's disclosure policy is a rebel with a cause.