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Silicon Valley always offers lots to see, and this latest trip to America's tech hub was no different. We visited executives, met robots, listened to keynotes, and chomped on In-N-Out burgers. We debated, considered, and finally settled on two stocks we think you can buy now, along with another that we think is worthy of your watchlist.
Tim's top pick: Riverbed Technology (Nasdaq: RVBD )
Riverbed is a study in contrasts. Located on the seventh floor of a San Francisco high-rise, the company is named after the co-founders' passion for fishing. The Big City meets Bass Masters. Only here, Steelhead refers not so much to trout but to the company's software for stripping inefficiency out of data delivery and storage.
Called RiOS, an acronym for Riverbed Operating System, the software includes an algorithm designed to do two things. First, it reduces the number of trips that data takes across a network to complete a task. And second, it reduces the amount of data shipped. All the magic happens in the software. RiOS boxes aren't much more than commodity computer parts strapped together to fit nicely in a data center or corporate network server room. Pair two boxes up -- one for the source, another for the destination -- and you have all you need for deduplication.
Never heard of deduplication? The name says it all. Think of it this way: A Word document that includes hundreds of references to the word "the," and that might ordinarily be sent in chunks, would be stripped down to include just one reference copy to "the," sent, and then reassembled upon arrival. Fewer trips with less data typically makes for speedier delivery.
Riverbed isn't the only company to offer this sort of wide area network optimization -- Cisco (Nasdaq: CSCO ) and F5 Networks also compete -- but the numbers show that clients love Steelhead, which today accounts for more than 90% of the company's sales. Revenue is up more than 40% in each of the past three quarters. That's growth worth paying for.
And you'll pay less than you might think. Analysts are expecting Riverbed to expand profits by just 28% a year over the next five. I know that in this context, putting "28%" and "just" in the same sentence seems silly, but consider that normalized net income has risen by a massive 470% since the end of 2009. With revenue-growth rates accelerating and operating leverage trickling better results down to the bottom line, why should I believe the company's success should slow down -- especially now, when so much data is flowing back and forth between private networks and the public cloud? I'm not buying what the bears are selling, and neither should you.
Karl's top pick: Pacific Biosciences (Nasdaq: PACB )
PacBio is trading on speculation about the size of the dent it can make in the DNA-sequencing market that Illumina (Nasdaq: ILMN ) and Life Technologies (Nasdaq: LIFE ) dominate. And investors are rightly uncertain -- with its first instrument just shipping commercially, PacBio can boast long read lengths and very fast reads, but it isn't yet a cost-effective answer for whole-genome scans. I love the technology behind the system, but it's easy to get all gooey about cool science and neat gizmos; what matters is whether these systems will find heavy use.
PacBio is impressive on a few counts. First of all, it seems to have healthy demand out the gate. It ended the first quarter with a backlog of 44 orders (at about $695,000 a pop), and each of these machines should produce somewhere around $300,000 in annual consumables revenue. Every one of the 32 manufacturing bays at the company was filled with a machine in the assembly stage when we visited.
Moreover, the company has done a good job locking up the intellectual property around its core single-molecule, real-time analysis technology. When it came time to construct its patent portfolio, the company hired the talents of Vern Norviel, the patent attorney at Wilson Sonsini Goodrich & Rosati, who was the architect of Affymetrix's (Nasdaq: AFFX ) patent strategy when he was the company's general counsel.
Whatever else you might say about Affymetrix, its patents were second to none -- nobody found freedom to operate around the company's basic DNA chip technology without paying a license fee. Even Illumina wound up paying the company $90 million to settle an IP dispute.
That IP is going to be important, because PacBio essentially has technology for taking a movie of what's going on at the DNA level while current technologies amount to intermittent photographs. What's not appreciated is that those movies don't have to be of DNA synthesis; they could be real-time looks at proteins, say, or drugs binding to proteins. That gives me more confidence that, even if the system doesn't grab a major share of sequencing, it will find an important niche in research that should justify its current valuation. On the other hand, if it can make the improvements that management is projecting and stay on schedule, it really should become the next big thing in sequencing -- and a home run for investors.
Honorable mention: NetSuite (NYSE: N )
Neither of us had seriously considered NetSuite for our portfolios before meeting with CEO Zach Nelson. Now you can consider us among the converted. NetSuite is catering to a large swath of midsized companies that want the benefits of sophisticated business software for managing inventory, accounting, and other business functions without the cost and growth constraints of owning a physical infrastructure.
The sell isn't simple. NetSuite requires customers to create a single data store for everything they track. But once all the data is in, building and deploying new apps and features becomes about as simple as exposing a new browser view. Nelson expects that model to encourage developers to create a number of industry-specific apps to layer on top of NetSuite. For example, imagine a clinical-trials management app for a biotech or a fleet-management app for a rental-car company.
As Nelson summarizes it, the fundamentals of business management may be everlasting, but the tools for managing the data that drives profits can change for the better. We think he's right, and that makes this a stock worth watching.
So those are our top picks among all the great companies that we saw. What tech stocks do you like right now? Use the comments box below weigh in and let us know what trends you see driving outrageous growth over the next 10 years.
You can follow our analysis on any of the stocks mentioned using My Watchlist.