Gaming market expands

The gaming market is also still expanding ferociously. The traditional market focused on 15-25 year-olds, but Nintendo has been able to grow its market with products such as Wii and DS, which interest children as young as four. In the US, the DS is also enjoying strong sales to seniors, sometimes as an overt effort to keep brain activity stimulated. However, Nintendo is primarily followed by Japanese analysts who - as a rule - are conservative and may be underestimating its earnings potential.The Wii and the DS top the sales charts. Software figures released by Media Create last week show that Nintendo's flagship Wii Sports has now cracked the two million landmark. The wide scale upgrading of PCs to Microsoft's Vista expected in 2008 should also provide a fillip for chipmakers such as Intel. Of the three investment trusts in this sector, Herald Investment Trust (HRI) gained 22% over one year to the end of July, while RCM Technology Trust (RTT) put on 14% and Polar Capital Technology (PCT) returned 7%

Further growth

Software as a service is another growth market as corporates look to rent software instead of buying it. Salesforce.com (CRM) headquartered in San Francisco, is the leader in on-demand customer relationship management services, famously founded in 1999 by former Oracle executive Marc Benioff, who pioneered the delivery of enterprise applications via a simple website. More than 32,300 companies of every description now use Salesforce.com to manage their sales, marketing and customer services. Another beneficiary of higher user expectations could be Riverbed Technology (RVBD) which provides fast wide-area data services solutions for companies, enabling a distributed workforce to collaborate as if they in close proximity. Growth in use of the internet across Asia is exploding. The Chinese internet market is currently $50 billion, compared with over $350 billion for the US. But, as a technology develops, it often makes sense to run with the market leader until the market has shaken down.Baidu (BIDU) is the big Chinese search engine, with an online collaboratively-built encyclopaedia similar to Wikipedia, and extensive searchable discussion forums. Baidu.com boasts the first Chinese license to allow the search engine to become a fully-fledged news website, providing its own news reports. Netease (NTES) is also competing in the search engine space, on the back of 30-plus million customers who use its free email service.While Baidu earns almost a quarter of sales in China's rapidly expanding online advertising market and has modelled itself on Google, two local portals, Sina (SINA) and Sohu (SOHU), listed on Nasdaq, hold 19% and 13.3% respectively. Tencent (3iTCEHF) operates a strong internet community in China with its instant messaging service platform, QQ, which accounts for 80% of that market. In August, it announced results showing year-on-year profit growth of 24.9% and a HK$59.4 million share buyback programme. In electronic advertising, Focus Media (FMCN) is China's leader in out-of-home advertising in places such as office lift lobbies, entertainment venues, shopping districts, mobile phones and residential complexes. It commands a 95% market share in office TV-panel advertising for example and has installed flat-panel LCD displays in over 85,300 high-traffic areas, such as the elevator banks of commercial office buildings to target business professionals with higher-than-average income. Last year, Focus purchased 70% of ACL, a movie theatre network which has the right to three minutes of screen time prior to the showing of each movie in over 120 cinemas throughout China. In February, the company acquired internet advertising service company Allyes Information Technology. There is currently, however, some uncertainty around the company as it is late to file its accounts with Nasdaq.

Virtualisation: A growth area

An interesting growth area is server virtualisation, where server partitioning technology separates the software from the underlying hardware, enabling multiple operating systems, such as Windows and Linux, to run simultaneously in one Intel server. This allows a single computer to run multiple operating systems and applications independently, improving efficiency and flexibility. Market leader VMware (VMW) was recently listed in New York and rose 80% on its first day, giving the company a $20 billion market value that makes it even bigger than Ford. After some difficult early years, VMware has finally convinced businesses that consolidated server environments cut capital and management costs. Research firm IDC estimates that the virtualisation market will double over the next five years to almost $12 billion, and that by 2010, almost 15%
of servers sold will be virtualised, compared with 4.5% of those shipped in 2005.VMware will continue to benefit from its early-mover and industry-standard status. It may also be somewhat artificially supported by its must-have status relative to its true free float size. Its rivals are Symantec (SYMC) and Microsoft (MSFT) and smaller operations that may take a bite of the small to medium-size business market, such as Virtual Iron Software and XenSource. The latter has software with functionality to rival VMware's and has just been bought by Citrix (CTXS) for an alleged $500 million - not a bad figure for an operation that started as a university research project.

IT stocks at bargain prices

Amazon founder, Geoff Ballard, coined the truism that technology watchers dramatically overestimate the impact of developments over the next two years, but they equally underestimate the level of change that will take place over the next 10 years. The exponential rate of technological change is transforming the world's media and communication structures, but IT stocks remains oddly cheap by historical valuations, as investors' confidence is yet to be fully regained in the sector since the dotcom bubble at the turn of the millennium. With the squeeze on private equity and leveraged debt, IT companies with strong secular growth on low multiples may finally become appreciated."We think there is still a lot of growth in internet companies," says Simon White, head of investment trusts at RCM. "At the top of the dotcom boom, many IT companies were on price-earnings growth (PEG) multiples of four or five. Many attractive IT companies are now on PEGs of one or two, and some of those that are growing fastest are the cheapest. Even if PEs expand, we think the level of growth coming through will make the sector perform well relative to the rest of the market."