In March 2012, I argued that the market was overwhelmingly focused on safety/value stocks, and that this left bargains in 5 growth-oriented technology picks. These picks are now up an average of 50.51% [see chart below from Google Finance, note that 50% average includes Digital Domain Media Group (OTCPK:DDMGQ), which went bankrupt and is counted at 100% loss]. Over the same time period, Nasdaq is up 17.42%. This article will discuss the 4 remaining companies.
Tesla (TSLA) +316.67%
Tesla Motors' popularity as a stock narrative has grown in orders of magnitude over the past 16 months. Readers are quite likely already familiar with the company, led by Elon Musk of PayPal (EBAY), SolarCity (SCTY), SpaceX and "Hyperloop".
Critics of Tesla's current valuation compare its multiple on sales (over 10x) to the multiples (far less) of traditional car companies. While certainly worth mentioning, this comparison ignores Tesla's distinct advantage in electric vehicle engineering.
Brian Johnson of Barclays puts TSLA's potential at $279 per share, or $33BB market cap, assuming mass-market success in 3-4 years (Tesla is developing a $35k car). The current share price of $142 clearly prices in some degree of risk with this figure in mind. Toyota (TM) has a market capitalization in excess of $200BB, which Tesla shareholders such as Kevin Rose reference anecdotally in discussing Tesla's room for growth.
In 2012, the debate around Tesla was not so much about valuation as basic survival. This perceived risk made shares cheap. The debate has shifted, and now the question is just how big and profitable Tesla will be. So investors should be aware that this is no longer the type of stock one could look to for a triple. Instead, the stock should attract risk-tolerant investors who are willing to hold through volatility for 5 years, targeting a healthy but more modest reward.
Pluristem (PSTI) +44.25%
(Biotech ETFs are up about 50% over the comparable time period.) Pluristem is a development-stage stem cell company in Israel listed on Nasdaq. It harvests treatment cells from the human afterbirth (placental). The argument for Pluristem's method is that competing methods are too expensive, too invasive, and/or require too much personalization.
The company has several potential applications across its pipeline, such as critical limb ischemia, intermittent claudation, muscle injury, acute radiation syndrome, and inflammatory bowel disease. It has intellectual property for a 3-D process to manufacture stem cells, and for this has built a factory.
The furthest any trial has gotten so far is Phase II, which puts Pluristem in a volatile high risk/reward category. Furthermore, biotech does not get the same popular coverage that Internet stocks get, and this leaves companies such as Pluristem vulnerable to unfair, unpredictable journalistic attacks.
Pluristem has a market cap of $190MM--this is pre-revenue. The average market size for Pluristem's applications is about $6BB, and it has over 10 potential applications which could take significant share. I believe Pluristem is fairly valued considering the knowns and unknowns, but I also believe Pluristem is a worthwhile opportunity to make a bet on the unknowns--the promise of placental stem cells. For more on this science, here is their website.
Google (GOOG) +33.35%
Google has shown steady earnings and revenue growth, which makes it very popular with portfolio managers, hence the above-average P/E of 25. The company is known for hiring the best engineers and producing consistently usable services.
Heavily watched these days is Android, which puts Google in a position of shared dominance with Apple (AAPL) in the mobile OS category. Tempering GOOG optimism last quarter was a 6% annual decline in PPC rates, widely associated with mobile. Google's response has been a repackaging in advertising sales and this is a work in progress.
Google has established itself as a company that can successfully adapt over long periods of time. Its services are slowly replacing predecessor services such as Microsoft's (MSFT). A multiple of 25 on annual earnings is not at all unreasonable for such a company in the tech space. So I believe Google continues to be an attractive stock to own.
Lightbridge (LTBR) -41.71%
Lightbridge is developing technology with potential to deliver outstanding improvements in nuclear reactor efficiency. The company has avoided long-term debt while funding this development, by generating revenue through consulting.
When most investors think about nuclear investing, they think about uranium miners. Lightbridge has traded in general correlation with such stocks since Fukushima. This makes some sense, as potential Lightbridge consulting revenues have been dampened by controversy in nuclear power. However, I believe the market should focus far more on developments in Lightbridge's patented technology.
There is a consensus among experts--that nuclear is a necessary component within energy--Elon Musk, for example, agrees. There is of course some room for debate about how many new reactors will be built in the next 15 years. But in any case, there is little doubt there will be a healthy market for Lightbridge's technology.
Lightbridge technology was recently validated by peer-reviewed publication in American Nuclear Society's Nuclear Technology Journal. Further, Pace Global, a Siemens (SI) company, conducted an independent study which concluded as follows:
Lightbridge's metallic fuel can deliver significantly improved economics to nuclear utilities from increased power output and extended fuel cycles, resulting in highly attractive returns on invested capital, even with conservative assumptions on reactor conversion and regulatory licensing costs, and fuel technology licensing fees paid to Lightbridge.
Lightbridge has developed a modular upgrade which can deliver in excess of 200% ROI to nuclear utilities. We're talking about 10-30% improvements on fixed costs. Lightbridge, which is led by an attorney, holds extensive patent coverage for this upgrade.
Lightbridge's team also includes former utility execs from companies like Exelon (EXC) -- thus Lightbridge knows potential customers very well and has a very textured grasp of buying criteria. Lightbridge conservatively projects a 20% penetration of this target market, leading to annualized revenues beyond $200MM as the upgrade hits the market in 2020. Lightbridge currently has a market capitalization below $25MM, suggesting 15x+ potential returns for those willing to take the risk on this niche engineering company.
Although these futuristic picks have rapidly grown in average valuation, the case for owning them remains strong. Patience, diversification, and independent research are key needs for investors dealing with high-risk, high-reward stocks.
Additional disclosure: The author was paid a nominal reprint fee by Lightbridge for a previous Seeking Alpha article in accordance with standard Seeking Alpha copyright policies.