3 Stocks in a Market With Exponential Growth

Given the popularity of Apple’s (Nasdaq: AAPL) iPhone and Google’s (Nasdaq: GOOG) Android phones in the United States, it would be tempting for investors to think the growth story behind the smartphone revolution is almost over. But that’s not the case.

In fact, it may be just beginning. The number of mobile broadband subscribers is expected to increase by a whopping 400 million this year — bringing the total to about 1 billion. By 2016, the number is forecasted to reach 5 billion.

This will mean worldwide data traffic will continue to grow at a rapid rate. Communication equipment firms Alcatel-Lucent (NYSE: ALU) and Ericsson predict it will increase as much as 30 times current worldwide demand by 2015. China’s Huawei predicts a 500-fold worldwide increase in data traffic by 2020.

I think the best way for investors to profit from this incredible growth is by investing in companies that provide technology infrastructure. This includes data centers, servers and other sophisticated software. The business may sound boring, but it can make investors lots of money, especially when there is a new megatrend.

In fact, this has happened before; that is, in the early stages of the Internet boom. Many new companies such as Yahoo! (Nasdaq: YHOO), Amazon.com (Nasdaq: AMZN) and Priceline.com Inc. (Nasdaq: PCLN) needed huge amounts of bandwidth and equipment. As a result, infrastructure operators saw big surges in their stock prices. For example, Cisco’s (Nasdaq: CSCO) shares spiked from $1.60 to $57.00 during the 1995 to 2000 time frame. Other operators including Nortel, Qwest, JDS Uniphase (Nasdaq: JDSU) and Global Crossing also posted stellar gains at the time.

Investors may get the same kind of returns with the mobile broadband boom. [It’s the sort of game-changing event that my colleague Andy Obermueller, editor of Game-Changing Stocks, always talks about.]

More important, it will be extremely beneficial for the mobile infrastructure operators. Let’s take a look at some of the companies that will benefit…

1. Alcatel-Lucent: The company has a storied history, which dates back to the days of Bell Labs in the 1890s. Now headquartered in Paris, Alcatel-Lucent is a top provider of sophisticated equipment for the telecom industry, such as routers and switches. Its market cap is about $11.3 billion.

Unfortunately, Alcatel-Lucent has been terrible for shareholders since the dot-com bust in 2001. Since then, the stock price has gone from $61 to a recent $5.

Yet Alcatel-Lucent has taken painful steps to streamline operations, with significant cost cuts and a better product line. At the same time, the company has been able to continue its innovation. The company has a portfolio of more than 27,900 patents.

While the company has posted losses since 2006, there are signs there may be a turnaround. In the fourth quarter of 2010, Alcatel-Lucent posted a profit of $465 million, which was the highest in its history. Revenue also increased by 23% to $6.6 billion.

It’s actually the top-line that will be key for Alcatel-Lucent since the company’s costs are relatively fixed. And based on the company’s global platform and strong technology, it looks like a good bet that the momentum will continue as telecom carriers continue to invest in their networks.

2. Akamai Technologies (Nasdaq: AKAM): In 1998, Akamai got its start from a professor, Tom Leighton, Ph.D., and his student, Danny Lewin, at the Massachusetts Institute of Technology when they realized there needed to be a better way to speed-up the Internet. So they developed a content delivery network (CDN), which uses sophisticated servers and algorithms to optimize bandwidth.

Now it looks as if the mobile broadband revolution will provide Akamai with another growth spurt — especially because of the use of video. In the past year, revenue rose 19%, or $1 billion, and profits were up 31% to $171.2 million. Cash flow from operations increased by a juicy $402.5 million. The company also has $1.2 billion in the bank.

While there is competition, Akamai remains an industry standard. It has a long-history of reliability and a network of over 60,000 servers, which is a major barrier to entry.

3. American Tower (NYSE: AMT): Founded in 1995, American Tower is a top independent owner and operator of wireless towers (it has about 30,000 locations). Based in Boston, the company’s market cap is roughly $21.6 billion.

The opportunity here is simple: as the major wireless carriers roll-out 4G (fourth-generation) networks and launch more smartphones, there will be strong demand for new towers to carry and deliver data to customers. And it is usually more cost-effective to outsource this to companies such as American Tower.

A wireless tower will remain in service for 10 to 20 years, which means a steady recurring stream of cash flow. So as the number of tower installations ramp-up in the next several years, this will result in a large amount business for American tower for the long haul. In fact, many of the tower contracts have escalation clauses, which increase the lease rates by 3% to 5% per year.

Action to Take —> All three companies mentioned above should benefit from the mobile broadband boom. However, in the case of Alcatel-Lucent, there are some drawbacks. Competition is perhaps the most problematic. American Tower also has some drawbacks. The most important is the rich valuation, which is at 48 times its projected earnings for the next 12 months. This compares to a projected revenue growth rate of about 16%. So it may be a good idea to wait for a dip in the stock price before moving in.

As for Akamai, its valuation is much more reasonable and is my favorite pick. The stock trades for about 22 times forward earnings, and its projected revenue growth rate is 20%. The company has a strong technology infrastructure that will be extremely difficult for competitors to replicate, enabling Akamai to maintain its margins and hefty free cash flow.  In light of its performance over the years, getting a 20%-plus return on the stock is reasonable.

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