Can Apple, Gilead and the Hot Techs Keep Growing?

I remember that one closest friend of my parents told me that the hardest period could be one of the great opportunities. That's so true. Some IT company generates lots of profits though others have experienced hardest time in history. Should I? I should! I believe that.

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Amid the roiling waters of the stock market and economy, which have tossed tech investors around for weeks, Apple Chief Executive Steve Jobs made a special guest appearance on Apple's fourth-quarter earnings call Oct. 21 to try to calm things down.

Profits soared (BusinessWeek.com, 10/21/08) on knockout iPhone numbers and strong Mac and iPod sales. But Jobs wanted to make a point broader than any one quarter's results: Apple planned to seize the opportunity of these difficult times to bolt ahead of the competition. He pointed out that Apple (AAPL) has nearly $25 billion in the bank. The economy could present "some extraordinary opportunities for companies that have the cash to take advantage of them," Jobs said. "We may get buffeted by the waves a bit, but we'll be fine—and stronger than ever when the waters calm in the future."

These are difficult times for all companies. But some are figuring out how to thrive amid the turmoil. BusinessWeek's annual Tech Hot Growth ranking shows the sector's top 75 performers over the past year. Some have done well because they help their customers cut costs—witness IBM (IBM), Accenture (ACN), and software maker VMware (VMW). Others made the cut because they help customers generate more revenue in good times or bad. Google (GOOG), for example, reported a surprisingly strong quarter (BusinessWeek.com, 10/17/08) on Oct. 16, because companies that get sales from online advertising kept on spending. It also doesn't hurt to sell to the government, whose buying tends to be somewhat insulated from the broader economy. That factor propelled infrared technology supplier Flir Systems (FLIR) and defense suppliers Mantech International (MANT), Harris (HRS), and SAIC (SAI) into prime spots on this year's scoreboard.

Gilead Sciences at No. 1

The ranking is based on a number of metrics. Revenue growth counts the most, although total revenues, shareholder return, and return on equity all factor in, too. The ranking is based on the most recent four quarters available, as of Oct. 15.

Gilead Sciences (GILD), the top-performing company on the list, booked big gains in profits and return on equity through sales of its drugs to treat AIDS, hypertension, hepatitis B, and other diseases. It has capitalized on the success of its most recently approved HIV drug, Atripla, and its 2006 acquisition of pharmaceutical company Raylo Chemicals.

At the fastest-growing information technology companies, it's clear you need to take a different attitude in downturns than in normal times. You must focus on why you're going to stand out from your competition and why your customers will need you more than they need your rivals. You have to think aggressively—as Jobs is doing—rather than defensively, in retreat. "Selling more of the same doesn't work," says John S. Chen, CEO of Sybase (SY), which provides database software used widely on Wall Street and which ranked No. 34 on this year's list. Because Sybase customers Bear Stearns, Lehman Brothers, and Merrill Lynch (MER) have disappeared, Chen is concentrating on helping the finance industry's consolidators, including Barclays (BCS) and Bank of America (BAC), find new ways to reduce operating costs. "I'm desperately creating a lot more new functionality," he says.

So far, so good. On Oct. 21, Sybase reported that third-quarter sales rose 11% to $284 million, and profits rose 2%. Sybase's profits were up more than 77% during the 12 months ended in June, according to BusinessWeek's analysis.

Stock Woes For All

Tech companies are scrambling for advantage in these lean times. Intel (INTC) is one of several catering to budget-minded shoppers. The chipmaker is ramping up production of processors for a new class of small portable notebooks that cost as little as $300 to $400. Oracle (ORCL) has spent $34 billion on 50 acquisitions over the last 44 months and plans to shop for additional bargain buys in order to generate recurring product-support revenues, which roll in during good times and bad. And in the past five weeks, Microsoft, Hewlett-Packard, and Oracle have announced plans to buy back billions of dollars of their own shares.

Still, it's been a rocky road for the stocks of even the best-performing companies. The average share-price return for the 75 companies on the scoreboard was -37%, and the top 10 on the list generated an average return of -22%. Dell (DELL), which posted big gains in profitability and return on equity by cutting costs and revamping its products and distribution strategy, has warned of a tougher environment ahead. And investors worry that the down economy may erode prices for such premium brands as Apple and Salesforce.com (CRM).

"We'll be prudent," says Robbie Bach, president of Microsoft's $8 billion Entertainment & Devices Division, which makes the company's Xbox game console and Zune music player. Microsoft hopes consumers buy more Xboxes as they resort to stay-at-home entertainment instead of going out. But Bach doesn't think consumers' holiday spending will accelerate until after the Presidential election. "At this time of year, we're talking to our retail partners every day," he says.