Rising Star Buy: Playing the Data Boom

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

This article is part of our Rising Star Portfolios series.

I've written recently about the opportunities facing investors as the amount of data sent through the Internet is exploding thanks largely to the growth of online video. However, just because a trend is apparent doesn't mean that investors targeting the field are assured profits. Take Cisco (Nasdaq: CSCO  ) , for example. The company thrives off increasing bandwidth needs, whether it's large companies buying more switching gear or powerful edge routers and core routers that carry massive amounts of traffic across Internet Service Provider networks. In spite of Cisco's place at the center of this structural change, the company has still struggled in recent quarters as demand for networking products slowed and competition intensified.

Against this backdrop I'm looking to put a couple of "feeler" lines in the water to look for companies that I see either as particularly advantaged by their position in the market or that can tangentially benefit from the growth in Internet traffic.

One to buy
The first company I'm going to take a small position in is longtime Fool favorite Infinera (Nasdaq: INFN  ) . The company is especially intriguing because of its unique, cutting-edge technology, which has been gaining market share in optical transport equipment, which carries communications between cities and within metropolitan networks.

Infinera's solution to making optical gear more effective relies on its "photonic integration technology." While that phrase looks very complex, it essentially means that the company has created chips that remove components from optical equipment and allow operators to better scale their network bandwidth in a more cost-effective manner. Essentially, Infinera's technology is extremely adept at alleviating many of the bandwidth limitations that booming Internet traffic creates.

So if their solution is so innovative, what's holding Infinera back? Like all potential disruptive innovators supplying telecom equipment, Infinera must fight against entrenched incumbents. Large competitors like CIENA (Nasdaq: CIEN  ) and Alcatel-Lucent (NYSE: ALU  ) can offer broader product portfolios and have long-established relationships with large telecom companies. While Infinera has managed to build out a good-sized customer list, continuing growth will increasingly come from branching into new products where Infinera has to again prove its superior technology over incumbent equipment providers.

Also, while Infinera has plans to release next-generation 100G products in 2012, other competitors are already hitting the market. Verizon (NYSE: VZ  ) recently announced a 100G deployment in the U.S. that will use CIENA optical transport solutions. If Infinera continues to be delayed hitting the market, it will increasingly be ceding gains to rivals. Until Infinera can demonstrate very strong 100G products ready for deployment, the market will take a dim view on the company as it hasn't proven it can take share in higher fiber capacity systems.

Overall, I still have reservations about Infinera and that's a large part of why I'm only buying a small position in the company. However, as far as dipping a toe in the pool with a potentially disruptive company with a strong balance sheet that includes $2.71/share in cash, I feel like Infinera's a good entry into discovering companies uniquely positioned to grow along with Internet traffic in the coming years.

One to rebuy
One company I'll be rebuying that is tangentially related to the growth in data is smartphone kingpin Qualcomm (Nasdaq: QCOM  ) . While mobile data is just a small piece of the puzzle, Qualcomm benefits from connected devices of all kinds. Of course, there's much broader factors that make Qualcomm a compelling opportunity, which I've detailed in my previous buy recommendations, which can be read here and here.

The stock has recently been hit over supply concerns after the Japan earthquake and general mobile fears. I believe both these fears are largely overblown. Mobile demand still looks extremely strong and Qualcomm's Snapdragon processor continues to be the most popular processor in Android phones. I'll take the stock's recent pullback as an opportunity to add a little bit to my position in what I consider a core stock for mobile investors.

Moving forward
Tomorrow I'll be buying about $500 of both Qualcomm and Infinera for my "Bits Portfolio." With Qualcomm, I'm adding to my position in a longtime favorite mobile stock. With Infinera, I'm testing the telecom equipment waters and could add more to my position if I see what I like. If you're interested in either Qualcomm or Infinera but want to learn more about them before taking the plunge, add either one (or both) to our free watchlist service to get updates from me and other Foolish writers.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Eric Bleeker owns shares of no companies listed above. Infinera is a Motley Fool Rule Breakers recommendation. The Fool has created a bull call spread position on Cisco Systems. The Fool owns shares of Infinera, and Qualcomm. Motley Fool Alpha LLC owns shares of Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1468075, ~/Articles/ArticleHandler.aspx, 10/23/2016 2:24:47 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
INFN $8.80 Down -0.09 -1.01%
Infinera CAPS Rating: *****
QCOM $67.93 Up +0.59 +0.88%
Qualcomm CAPS Rating: ****
ALU.DL $0.00 Down +0.00 +0.00%
Alcatel-Lucent CAPS Rating: ****
CIEN $19.93 Down -0.19 -0.94%
Ciena CAPS Rating: **
CSCO $30.15 Down -0.01 -0.03%
Cisco Systems CAPS Rating: ****
VZ $48.20 Down -0.94 -1.91%
Verizon Communicat… CAPS Rating: ****