Last November, Intel announced a suite of new chips boasting 420 million transistors per dual core. This nearly doubling of transistor density over Intel’s previous product line may be the biggest transistor advancement in 40 years. By 21st-century standards, however, the microprocessor business is a mature industry. It’s way too late to get in on Intel’s transformational phase, a phase I describe as having stock returns measured in the tens of thousands of percent.

Nevertheless, this accelerating increase in chip power is giving birth to entirely new technologies and companies. Some of these companies will match or surpass the transformational profits earned by Intel and other tech stars of the past. Not only are microprocessors getting smaller and faster. They’re working more intelligently. They use less electrical power. Most importantly, they deliver more computational power for less cost. These are trends that will continue in the future.

In a sense, of course, this is old news. Some analysts seem almost bored by microprocessor advances, if not downright cynical. I get the feeling sometimes that I ought to not be so excited about this stuff. The truth is that I’m as awed by progress in this field today as I was when Cray supercomputers and preassembled PCs first came to market in 1970s. It’s not that I have a chip fetish. Rather, I know that increases in computational power create new markets. That, in turn, offers extraordinary opportunities to investors with the insight to recognize the nature of this ongoing transformation.

Slightly farther down the line, components such as carbon nanotubes and memristors will kick in to keep picking up the pace. Already, however, increases in chip power and cost-effectiveness are spawning entirely new technologies and products. While Intel may no longer have transformational profit potential, some of the companies that build on new chips do. The task now is to identify emerging technologies that will catapult to transformational status by microprocessor advances. Some of these technologies are obvious. Some are less so. The most obvious consequence of chip improvement, I think, is theconvergence.

Profiting from the Convergence
The term convergence signifies, of course, the merging of various electronic devices. This includes phones, personal computers, media players and GPS locators. The process is well under way. Phones and computers resemble one another more and more every day. People are using laptops for Internet-based phone calls and video conferencing. Many of these services, such as Skype, are free. My 10-year-old and her older brother both use free Google and Yahoo Voice over Internet Protocol to talk with groups of their friends, often while playing multiplayer online games.

Of more relevance, mobile phone devices are acquiring computer capabilities. Within five years, gadgets small enough to fit in your pocket will have more computational power than most laptops today. This will happen not only because of hardware advances, but because much more of what we now do on PCs we’ll do remotely via Web apps. Mobile Internet access will also continue to improve in terms of quality and cost. All these factors will amplify the power of mobile devices.

It’s a Small-Cap World After All
It’s unlikely, however, that profits from the companies that actually manufacture these all-in-one devices will be transformational. As with the chip business, the mobile phone industry has been around too long to generate spectacular profits. Competition among the many players dedicated to that market, including several in low-labor-cost China, will keep profit margins down. I’m not saying that the proliferation of mobile computing devices won’t create transformational profits. It will, but the chip and phone manufacturers won’t be the ones earning them.

As new technologies enable these unified phone/computer/media player machines, the companies that control trailblazing components will make transformational profits. Small caps with the right patents and expertise will reap enormous returns. Their share of total revenues from each device sold may be small, but the sheer quantity of these portable computing devices will make up for it.
We’ll keep our eyes peeled for the best way to profit from this tech revolution.

Until next time,
Patrick Cox

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