Placing a wager on tech companies can be a risky endeavor. It's an activity that value investors like me rarely partake in. However, a well-placed bet can payoff handsomely, and lately even the most esteemed value players, including Warren Buffett, are getting in on the game.
By engaging in thorough research, I believe investors can identify key trends and turn the deck in their favor. Let's take a look at how I would place my bets in the year ahead.
Know when to hold 'em
As the third-largest personal-computer manufacturer, Dell (Nasdaq: DELL) once dominated the technology sector, providing returns over 8,200% in the first decade after its IPO. Subsequently, the stock lost a depressing 45% of its value in the 10 years that followed. Somehow a nine-bagger tech darling turned into a complete dud for investors.
Recently, however, Michael Dell announced that the company will become a "serial acquirer" and move into higher-margin businesses such as systems management and cloud integration. Given the razor-thin margins in computer manufacturing, this is a step in the right direction. However, in my opinion, this move will fail to boost shares in the near term.
Dell's shift concedes that it cannot compete with Apple (Nasdaq: AAPL) to generate innovative, high-margin devices. Similarly, the push into services arrives decades after the former PC maker IBM began a similar transition. The gradual shift will require Dell to discontinue certain low-margin businesses, which could hamper near-term revenue growth.
While not thrilled about Dell's 2012 prospects, I think the gradual transformation from a manufacturer to a high-tech solutions company could be successful. In the meantime, I would hold this stock while scouring the market for better opportunities.
Know when to fold 'em
Around the time Dell's stock peaked, another tech company made its debut on the IPO market. Research In Motion (Nasdaq: RIMM), maker of the once-ubiquitous Blackberry PDA, went public just before the dot-com bubble. Almost a decade later, the stock had returned more than 7,500% to initial investors. Sound like a familiar story?
For those who played their cards right, RIM was a stock worth doubling down on. Business users touted the user-friendly email applications and security features built in to its sturdy BlackBerry devices. In a multibillion-dollar mobile industry, RIM stood out as a first mover.
Unfortunately, RIM's story parallels that of Dell's in some respects. Both companies gained a foothold in their respective markets with functional, if somewhat unexciting, computing devices. Along the way, leadership failed to use cash flow from core products to reinvest in cutting-edge technology. Dell, as I said, plans to leverage its computing resources to move into higher-margin services, but RIM seems set to flounder.
The stack of chips Apple and Google have accumulated at this point will only make it easier for them to push their rivals around. Last-ditch efforts such as distributing software or borrowing Android apps appear as all-too-obvious bluffs by a fading company. Why purchase a BlackBerry if I can obtain its security features in an iPhone? Does a PlayBook make sense with only a fraction of the Android apps?
Although a buyout could lie ahead for RIM's valuable technologies, slow-playing this stock seems like a risky bet. I suggest shareholders abandon RIM in 2012, and I plan to assign an underperform CAPScall today.
Know when to bet the farm
In recent years, neither Dell nor RIM emerged as potential "Apple killers." So which companies will be winning bets in 2012? Well, we all know the saying: "If you can't beat 'em, join 'em."
I expect Apple's shares to beat the market in 2012, but perhaps there's a better way to play your hand. With a market capitalization of almost $400 billion, Apple's heady growth period is well in the past. Investors could do better with key Apple suppliers such as Corning (NYSE: GLW) and Cirrus Logic (Nasdaq: CRUS). Both stocks have the potential for runaway growth in 2012.
Corning certainly isn't a tech start-up, but this fiber-optics and glassware company has strong ties to the industry. Apple helped reintroduce Corning's Gorilla Glass with the launch of the iPhone, and now the scratch-resistant glass can be found in nearly 600 products.
Back in October, even before the company announced a 50% dividend increase, fellow Fool Anand Chokkavelu identified Corning as an "underestimated business with enhanced pricing power and prospects." Trading at just 6 times earnings with a dividend yield over 2%, Corning looks like a screaming buy to cash in on the mobile market.
Cirrus, on the other hand, has even stronger ties to Apple, since the audio chipmaker derives about half of its revenue from sales of the iPad and iPhone. Cirrus shares recently shot up on announcements of strong revenue growth in the third and fourth quarters of 2011, and the stock should only climb higher with Apple releasing new versions of core devices in 2012.
Fellow Fool Eric Bleeker selected it as part of his Rising Stars portfolio in November 2010, and shares have returned more than 52% since then. In my mind, Cirrus might be the closest thing to a sure bet in the year ahead.
Foolish takeaway
Although gambling and investing fall under different categories in my book, there are some key similarities. Most notably, investors need to keep their composure and seek out opportunities to exploit an advantage over the competition.
In the tech industry, look for broad trends that will dictate the winners and losers in 2012. The companies I've recommended here will benefit from a surge in mobile media, as will another company I discovered in a Motley Fool report. Read "The Next Trillion-Dollar Revolution" to learn more about a company dominating the mobile market. Thousands have downloaded a copy, so get yours here -- it's free.
