An Eye for Innovation

David Saunders of Credo Capital Management prefers growth companies with one-of-a-kind technologies

And where is the growth coming from?

Redbox made up 60% of Coinstar’s total revenue in the second quarter of 2009. In addition, the number of Redbox kiosks is expected to increase to some 21,000 this year. It’s more about the product than consumer demand—this is a value proposition for consumers in this economy. Coinstar also has the change-counter, a kiosk that counts coins, and the company has deals with a number of retailers, but Redbox is their biggest driver. We have a 12-month price target of $45.

Are there any other companies with that kind of edge?

There’s DTS Inc. (DTSI), a company that has a patented audio technology that they’ve mandated as a standard for high-definition and Blu-ray discs. The company licenses its technologies—for things like enhanced sound quality—to disc makers. So their growth story is that Blu-ray discs are now about $25 each and the players cost around $250. Blu-ray has to come down to $15 to have broader consumer adoption—we’re seeing that occurring now—Walmart now sells one player for $148, so we think it’ll be more prevalent during the holiday season. We’ll see the players come into the $100 range, which will be more economical for consumers. What’s happening with TV is that people have new expectations after the HDTV adoption—they want the same experience when they’re watching their discs. Now that Blu-ray discs are getting closer to the price of a DVD, it’s becoming more interesting. The technology [known as digital theater system, or DTS] was 15% to 18% of the total revenue in 2008, and we expect it to be more than 20% to 25% in 2009. They also have actual cinema technologies. They have exposure to the auto industry too—they’re used in car stereo systems and in computers. Manufacturers like Dell are adopting the technologies. As you’re listening to music on your computer or laptop, the DTS technology is there filtering through your speakers. Our 12-month price target for DTSI is $38.

You have a lot of confidence in the technology sector. Why?

We’re seeing the greatest confidence in technology stocks. People working smarter and pushing productivity improvements are what will drive growth in the U.S. as we come out of this recovery. My final pick exemplifies that. NetSuite (N) is a software provider for entrepreneurs and small businesses that don’t have the money to buy expensive overall communications systems for inventory, back-office, and sales. Through NetSuite, small companies can purchase at a lower price some of the same software that large businesses use—which previously had not been available to smaller companies at these prices. The software has a financial application and an inventory management system. The company went public in December 2007. They mapped out their mission and stuck with it in an economy that hasn’t been the best. The software-as-a-service—also known as SaaS—market is a great opportunity. NetSuite has the ability to touch a lot of businesses. Larry Ellison [founder and CEO of Oracle] is one of their top shareholders. NetSuite’s CEO, Zach Nelson, is a former Oracle executive. Our 12-month target for NetSuite is $22. As the economy recovers, these guys will do even better.

This article originally appeared in the November 2009 issue of Black Enterprise magazine.

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