This story is part of a weeklong series that looks at the top 10 trends to help you invest in the coming year. Click on the tile at left to see other stories.
In 2000, investing in the PC market means looking everywhere but at the PC.
Products such as Research In Motion's (RIMM) email-accessible pager and Casio's Cassiopeia handheld organizer are the hot sellers, and they enable people to take a PC's functions anywhere. And these days, that's seemingly what everyone wants.
Companies that offer this capability -- or even a promise to do so -- are winning in the marketplace and the stock market. Last year, the Dow Jones Computer Peripherals Index shot up 132%, compared with a 45% return for the Dow Jones Computer Hardware Index.
At the other end of this PC spectrum are enterprise computing companies called application service providers, or ASPs -- companies that offer Internet-based software or Web-hosting programs to companies. Names such as Viant (VIAN) and SilverStream (SSSW) became ASP highfliers, rising 306% and 381%, respectively, last year.
"Our investment thesis is that the profits in the computer industry are moving above and below the PC -- above into enterprise computing and below into information appliances," says Steve Milunovich, a hardware analyst in Merrill Lynch's technology group.
For PC makers, all this means tougher times ahead as their actual boxes become less crucial.
Of course, some PC companies are trying to evolve. Dell (DELL), for instance, partnered with Research In Motion, maker of the de rigueur Blackberry pager-plus favored by corporate executives who need their email no matter what their latitude.
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Compaq's Aero, H-P's Jornada and Casio's Cassiopeia sold out in the fourth quarter, says Michael Kwatinetz, an analyst at Credit Suisse First Boston. (His firm has done no underwriting for Compaq or H-P.)
On the enterprise computing side, H-P will exchange computer equipment for revenue from communications networker Qwest's (QWST) ASP unit.
The problem is that all these ventures are still relatively small for these companies, which means they won't make much of a dent in the bottom line for some time. In fact, Merrill's Milunovich doesn't even include handheld sales when putting together his boxmaker earnings models.
Small Items, Big Growth
Instead, the real growth is coming for companies such as 3Com's (COMS) Palm Computing unit, which 3Com expects to spin off this year. Then there's privately held Handspring, run by the Palm co-founders. Its Visor handheld computer has seen overwhelming demand. Handspring is considering going public.
Bypassing the PC by using cellular phones with Internet connections is also gaining momentum. Phone.com (PHCM), which sells software for the delivery of Internet-based services to wireless phones, is benefiting from this trend and has plenty of company, including Ericsson (ERICY) and Wireless Knowledge, a joint venture between Microsoft (MSFT) and Qualcomm (QCOM).
Then there's the enterprise software business, including big names such as Sun Microsystems (SUNW) and EMC (EMC), as well as smaller firms like USinternetworking (USIX) and SilverStream. This business is a threat to PC makers because it can force them to churn out cheap boxes that do little more than attach to the Net, says Sam Albert, president of the PC consulting firm Sam Albert Associates.
Never Fear, the PC Is Here
"We are entering a big space of utility computing, so we aren't that concerned yet about our competition," says Nick Earle, chief marketing officer for H-P's enterprise computing division. "The key word for us is going to be mobility. By partnering with Qwest on the back end and companies like Swatch on the front end, we feel we will have a lot of that." H-P signed a deal late last year with the Swiss watchmaker to turn its watches into Internet appliances.
It's unclear whether Dick Tracy-like wristwatch Net surfing or cell phones that can download War and Peace will be a trend that affects the boxmakers' bottom line. But those that fail to acknowledge the move away from the desktop PC will find upstarts such as SilverStream, Palm Computing and Research In Motion eating away at their market share.