You know how it is. Something happens. It seems small and insignificant at the time. And yet you cannot forget it. Every now and then you are reminded of it. It gnaws away at you.
IT small cap eyes new targets after disposal windfall
Well something is gnawing away at me just now, and I’ll tell you how it started. Just before Christmas, a nice friendly gentleman from BT rang me up and asked me whether I wanted to increase my broadband capacity. Not being much of a techie, I did not really understand what he was talking about. - IT consolidator XploiTe (ticker: XPT) sells its Anix subsidiary for £31.5m in cash, well in excess of XploiTe’s £23m stock market valuation.
- The deal represents a cash profit of £10.5 million, which would in the short term be used to pay down bank debt of around £7.6 million.
- XploiTe will now use the cash to buy IT companies at a time when valuations are attractive.
I have signed up for some peculiar package called something like ‘BT Options Plus Family and Friends Together All You Can Eat For A Fiver’ and as far as I was concerned that was that. I’d pay for my phone calls but when it came to the use of the two computers in my home I could sit in front of both of them all day long if I wanted to without paying a penny extra.
It seems I was wrong. It seems that my family is now using so much of BT’s precious broadband capacity that they are threatening to charge me extra. How has this happened?
The cost of bandwidth
I blame my children. I have two teenage sons and when they get home from school they sit in front of the PC watching repeats of ‘The Apprentice’ or a video of the latest pop idol. This all uses bandwidth and one thing I do know is that videos use a lot more bandwidth than simple text.
Having got that far, I began to notice a few other things. I began to notice how I was not just reading text off the screen but watching corporate videos and webcasts. I have even sampled the joys of Youtube. I have read how the social life of teenagers – and not just teenagers to be honest – seems to revolve around Facebook. I noticed that the train operators were in trouble for offering discounts on tickets bought for on line. But why single them out? Lots of organisations charge less for their products if ordered on-line. The fact is that it costs less to transact business this way.
Here is another thing about the internet. Its use does not just grow. It multiplies. Take one of those social network sites. Suppose it had five members and each of them were so sociable or so lonely that they wanted to speak to each other every day. That would require ten conversations. But if another five people join the club then for each person to speak to each other requires forty-five conversations.
Then think of the Grandmother whose grandchildren are in Australia. She buys a PC, goes on-line, starts to receive all those photos of her nearest and dearest. And before she knows it she is buying airline tickets on-line, she is checking the weather forecast on-line. If she goes just a little mad she might start placing bets on-line. She might even end up as a ‘net hog’, one of those 5% of users who use 95% of the available bandwidth.
A new investment theme in internet capacity
This type of thing is happening all the time. The use of the internet is multiplying. And it is not just because of the behaviour of individuals. Organisations of all sizes are basing their business strategies on the internet. It allows staff to work from home. It allows companies to communicate with their suppliers and customers all over the world. Digital data is piling up relentlessly and must be stored somewhere. Internet usage is growing very fast indeed.
Which brings me back to my friend from BT, and reminds me of what was said in the City in those heady days of the dot-com boom in the late 1990sand early 2000s. So much internet capacity, the analysts told us, was installed a decade ago that it will last for ever. But it seems they were wrong. Capacity constraints are starting to appear in the fibre optic network and this has two inevitable consequences. It means that those who own the network have pricing power. And it means that there must be new investment in the infrastructure of the internet.
This has all the makings of a powerful new theme for tech-savvy investors and I am looking for ways to play it. I note that the share price of managed hosting and data services group, Telecity (ticker: TCY) is rising strongly. That could be one way. Sandvine (ticker; SAND) is another small company that has been mentioned in this context.
These shares have already risen considerably, so I am looking for new opportunities. I described one excellent company in the latest issue of my newsletter Red Hot Penny Shares . This share could benefit directly from growing investment in internet capacity. I am sure there are plenty more. The hunt is on…
Good investing,
Tom Bulford
For The Penny Sleuth
P.S. You can access my latest Red Hot Penny Shares issue and the details of this exciting play on the internet capacity theme, by clicking here.
P.P.S. If you want to follow the insights of a small company investor, and uncover the hidden gems of the stock market, find out more about The Penny Sleuth by clicking here.
