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.
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.