Alex Daley of Casey Research on Finding the Best Technology Stocks: Part 2

In part one of the Investing News Network’s interview with Alex Daley of Casey Research, the analyst spoke about the importance of investing in growth when it comes to looking for the best technology stocks.
Overall, he suggested that while new technologies can be interesting, they can take longer than expected to get to market. In that light, it’s often better to focus on a company’s revenue graph rather than its underlying technology.
In part two of the interview, Daley spoke a bit more about why investors need to be careful when looking at new technologies while searching for the best technology stocks.
“Technology investors have to learn to separate the difference between science and technology. Those are two very different things,” he said. While new technologies can be interesting, Daley noted that “turning that into a practical technology that’s cost effective, that can go to market competitively and that people will adopt at scale, that’s what takes time.”
“As an investor, the science is interesting, but it’s the growth that you want to buy,” he said. Certainly, that’s a key point for those on the lookout for the best technology stocks.
Daley also spoke about the “hype cycle,” coined by Gartner, in which a spike in excitement for new technology is followed by a “trough of disillusionment,” and then by a slower slope upwards as mainstream adoption increases. Understandably, Daley said that the far side of the hype cycle is most exciting.
“I think the most exciting area of technology to be is wherever other people aren’t excited,” he said, adding that it is especially key to keep an eye on what was exciting three or four years ago. Daley explained that he does “follow everything,” but for the most part, that’s just to find out when people stopped listening. Specifically, he pointed to Bitcoin and 3D printing as sectors that could become interesting again soon.
Certainly, those on the hunt for the best technology stocks will want to place their attention where Daley is looking: on the other side of the hype curve.

Interview transcript
INN: Speaking to a more recent trend, what are your thoughts on commercial drone fund, more specifically the commercial drone ETF?  
AD:  Yes, so drones are an interesting technology because all the marks I look for in what we call a disruptive technology, are they change the economics of it.  They take, when it comes to military, for example, they take people out of the cockpit which reduces cost of labor, it reduces human fatigue and mistakes, reduces the liability that comes along with accidentally getting somebody killed, making a bad mistake.  But it also means drones can fly 24/7 which people can’t do, I mean, they don’t get tired, they don’t hurt their back, they don’t make mistakes, they don’t injured, they don’t go off the job.  So drones are running 24/7.  So they give you capabilities at the same time, they reduce costs, and that is the definition of a disruptive technology.  Is an entirely new kind of the economic model, if you will.
The thing about drones in the commercial sector is the FAA hasn’t moved yet on whether or not drones are going to be allowed to fly over the United States, similar countries all around the world have got problems with where will drones be able to deployed and what altitudes and what numbers, how will air traffic control happen?  Bureaucracies don’t move quickly.  Just like driverless cars, it’s going to be decades before we see drones flying over cities in number, if we ever see it at all.  It could be a thing where the government cites, “Hey, this is not a vision of what we want for our society.”  And that’s a huge risk.  I mean, a risk that’s really hard to put a multiple clamping thing.  It’s not like, say, the, risk that this drug or that drug is going to be evaluated positively by the FDA.  You kind of handicap those odds.  
It’s pretty hard to handicap the odds of, you know, presidential elections, and the FAA policy and Congress and what they’re going to do.  So, investing in commercial drones is really honestly best on by staying in the Defense Department right now.  I mean, pure play technology has got a huge risk in it.  May have high potential upside but drone is really easy to copy.  All the patents in that technology are gone.  The patents have been expired. They were sucked up by the Defense industry.  So now you’ve got all these open-source drones, 3D robotics, these kind of companies that are out there just saying, “Hey, build your own drone at home.  It only costs you $0.99 or whatever.”
So you have a bad mix.  It’s good economics for the buyer of the drone, but not necessarily the seller who can have no competitive moat like we talked about earlier.  There’s really no way for somebody making a drone other than relationship, say, with the Defense Department or Fortune 500 companies being that kind of big supplier.  Other than that, what other competitive advantages can you have when you don’t really have any patents when the software systems are predominantly open source today?  
So I haven’t seen any player really emerge under the field that I think can win in a commercial space, hang long enough for the regulators to get around.  And so I think commercial drones by Lockheed Martin (NYSE:LMT), that’s really your best play on drones.  At the end of the day, it’ll improve company’s margins, they make a great deal of margins on servicing in maintaining those kind of things.  
But, you know, is Amazon (NASDAQ:AMZN) going to be delivering packages via drones?  You know, that was a popular news story.  Not in the next decade, that’s for sure.
INN:  Okay.  And what are some of the most important transfer technology investors to stay abreast of?  
AD:  Technology investors have to learn to separate the difference between science and technology.  Those are two very, very different things.  So you can go out and you can read [about the newest technologies] and have an absolutely fantastic time learning about this and that, genetic discovery, how degraded mice who don’t age, or you feed them red wine and coffee and live forever and all these kind of little scientific discoveries turning that into a practical technology that’s cost effective, that they can go to market competitively that people will adopt at scale.  That’s what takes time.  
What you really want to look for is what are people buying?  What are people using?  You want to find out what the next hot technology company’s going to be?  Open up the App Store on your iPad and just look at the top-paid applications or the top three applications trending graphs.  Again, by growth.  
As an investor, the science is interesting but it’s the growth that you want to buy.  So you want to find those companies who are posting real growth in the number of users, doesn’t necessarily have to be revenues today, but who can show they can build a community that can sustain that community of users, and then, eventually, they’ll be able to monetize them.  
Drones, for example, have built the community of users certainly, we’re seeing hundreds, thousands of people now building and buying drones who never would have before, whether or not they can sustain and monetize that community, that’s the question.  This thing is a novelty and wears off.  
But you look at things like what’s happening?  Facebook (NASDAQ:FB) spent millions of dollars buying a messaging company and the reason they spent those millions of dollars is because that was time that users weren’t spending inside of the Facebook application.  And that’s a big risk to Facebook’s revenue.  So, you know, Kick, these kind of like Snap Chat, etc. Well, they may seem like ephemeral products as these last, as they stick around, as they prove a couple of years’ worth of consistent usage by their users and growing, they’re going to become a threat to somebody’s advertising revenue or somebody’s monetization model.  They’re going to get snapped up.  
So, again, you buy growth – buy growth in users, you buy growth in revenue, but at the end of the day, buy something that’s sustainable, continuous, compounding growth and that’s your best bet as a technologist.  

INN:  And finally, what area of technology sector gets you most excited?
AD:  People go back and forth on technology with they’re hot and cold. They loved 3D printing a couple of years ago.  Now, you barely hear anything about it because most of the 3D companies were just raising capital when they could.  Gardner has a great explanation for this.  They call this the hype cycle and this is graph that kind of has big bump at the front where everybody gets really, really excited about the technology and it comes down like a roller coaster on the other side where everybody like, “Oh, just didn’t work.  It didn’t work.”  And then, a couple of years later, the technology people were excited about is in market working and making money. And I like being on the far side of that hype cycle.  
So, I tend to not get excited about the things that people are excited about.  When I see everybody talking about drones, then, I’m going back and looking and say, “Hey, 3D printing is probably a good place to start looking right now.”  And in fact, 3D printing valuations have come down dramatically.  I don’t think it’s a good investment yet.  But you give that another six months, another year, and those companies are going to start to look really, really interesting from a valuation perspective.
So I think the most exciting area of technology to be is wherever other people aren’t excited.  And wherever they were excited two or three years ago, even four years ago, you’re going to be on the other side of that hype cycle and you can start to sort of shake out reality from the hype, and invest in something that’s actually going to grow.  And that’s really the interesting part to me.  
So, while I do follow everything.  I follow it so I can find out when people stop listening to it, right?  Things like Bitcoin.  Bitcoin’s going to become an interesting technology now.  But as people have stopped talking about it, stopped caring about it, the value of Bitcoin with a capital B has sort of disappeared.  And Bitcoin with a capital B is not going to be here in five years.  It’s just useless technology as in implementation with the concept behind it if improved could be actually huge for payment processing networks, for private market transactions, dark pools of capital, it could be a big, big, big financial innovation.  But it’s the underlying technology when it gets a little more investment, a little more maturity, but certainly the companies that exist today, a few, if any, of the ones we know, are going to be the ones to emerge really dominate that field.  
So, that’s where I like to look.  I like to watch the other side of the hype curve.  
INN:  Great.  Thank you for joining me, Alex.  
AD:  Thank you.  It’s a pleasure.      

Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
Related reading:
Alex Daley of Casey Research on Finding the Best Technology Stocks