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We’ve already talked about how Apple Inc. (AAPL:NASDAQ) is known for introducing new devices going into the Christmas cycle. Most recently, of course, it was the new Apple iPhone, followed up by the iTouch, and newer versions of its iPod Classic iPod nano with video.
It was only a matter of time before Microsoft Inc. (MSFT:NASDAQ) would counter Apple’s new products with a new music player of its own.
MSFT originally released its Zune digital music player last Christmas. With some welcome modifications, MSFT is introducing a new version of Zune that will roll out in November of this year, just in time for the holidays.
Granted, the Zune has been little competition to the iPod. Only 1.2 million Zunes have been sold (20% above MSFT’s set sales goal, though) compared to sales of 21.1 million iPods.
There are three Zune players that will be available in November: a $249 Zune 80 that can hold 20,000 songs, a Zune 8 for $199 that holds 2,000 songs, and a Zune 4 for $149 that holds 975 songs.
While the Zune isn’t as sleek and touch-screen efficient as the new iPods it does own up to a trademark Zune Pad that allows users to navigate through songs a la Touch. In addition, the first as well as the newest edition of the Zune offers wireless capability, allowing users to share music with each other and with other computers, something Apple only introduced recently in its iPod versions.
And Zune, which uses the Zune Marketplace for music (comparable in function to Apple’s iTunes) will add one million new songs without copy protection to its library for download.
Even Microsoft and its man at the helm, Bill Gates, don’t consider the Zune a viable competition for the iPod, but argues instead that the device is one baby step in the tech giant’s goal of combining music, video and movie management across all other Microsoft devices.
While Microsoft’s Zune currently lags behind the iPod as a secondary music player, MSFT has seen other successes, like its Xbox 360 video game system which has sold more than 11.6 million units, outselling the Sony Corporation’s (SNE:NYSE) Playstation console.
This brings me to the best strategy I’ve seen so far to play the new tech boom: buy the nuts and bolts companies (essentially the semiconductors) of larger company’s popular devices.
I have to admit that sometimes it does pay to buy the major company as well.
Microsoft is an example of that right now. With the introduction of new Zune models for Christmas, the company is bound to see some popularity translated into stock gains in the near future. It happened last year when it first introduced its Zune player: MSFT stock moved 15% from October 2006 to the end of January 2007, not a bad gain on such a large-cap stock.
Granted MSFT until very recently was known for trading within a $24 to $28 channel, but it appears the tech giant is breaking out. New long-term support points to a price of $36 at least by January 2008, a good 22% gain from its current price.
Of course you’ll get more bang for your buck if buy the companies MSFT chooses for partners. A breakdown by iSuppli of Microsoft’s popular Xbox 360 gaming console showed that much of its magic came from International Business Machines’ (IBM:NYSE) silicon chips, a company we happen to hold in the Diligent Investor portfolio with 44% gains.
While IBM is currently priced at $120 per share -- and I do consider it expensive to buy right now -- the use of IBM in Microsoft’s popular gaming console correlates well to its recent stock success: since the release of the Xbox 360 in late 2005, the stock has gained 32%.
But the best stock gainer from Xbox 360 seems to have come from Advanced Micro Devices (AMD:NYSE), which supplied the system’s GPU, or graphics adapter. ATI was only a $30 stock when it was identified as supplying parts to the Xbox 360… now it’s $110 per share, a gain of 267% in less than two years.
ADM is a great example of the kind of tech stocks I’m searching for now: small companies that receive a “seal of approval” from a stronger tech company, cementing their future success.
As far as MSFT’s Zune MP3 player, when it was first released companies like Freescale Semiconductor Inc. (FSL:NYSE) and ARM Holdings plc (ARMHY:NASDAQ) were found to be partners. FSL and ARMHY also profited from their deal on the Zune: FSL was taken private by private equity’s The Blackstone Group (BX:NYSE) and ARM’s stock has gained 34% since the end of 2006 (still at a good value below $9 per share).
Once the teardown for the new version of Zune is made public in mid-November, I’m sure we’ll see some unlikely small semiconductor outfit that’s bound to go gangbusters after being given the seal of approval from Microsoft. And you can bet that I’ll let Diligent Investor subscribers know all about it.
In fact, this strategy we’ve started employing is already proving to be profitable. The small semiconductor stock we bought that’s riding on Apple’s coattails after being included in the new iPhone and iPod Touch products has gained 2.5% at its most recent high after we entered it nearly a week ago.
That’s nothing compared to the gains of 213% I expect on it in the short term.
In the new tech age, the best strategy is simply to follow the big guys’ lead and invest in the small companies that make the “magic” happen.
Ann
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