Devotees call it the biggest thing since the Industrial Revolution. Nanotech, they say, promises to reengineer the man-made world, molecule by molecule, sparking a wave of innovation in everything from machines to medicine. Over the past three years, venture capitalists have poured some $900 million into the field -- few call it an industry yet -- while governments have invested many billions more in research & development over the past decade. "After biotech and the Internet, nanotech is the next place for growth," says John M.A. Roy, an analyst at WR Hambrecht + Co.
Yet for investors, buying nanotech stocks is more black magic than science. There are only about 30 companies focused on nanotech listed on NASDAQ, and profits are scarce, making financial analysis more like guesswork. What's more, adds Roy, many of the players engage in research so complex and with such uncertain timelines that even other scientists have trouble valuing their innovations, let alone their business models. "On the science side, nanotech's for real: It will dominate the world for the next 50 years," says Darrell Brookstein, managing director of Nanotech Co., a San Diego consultancy and author of Nanotech Fortunes: Make Yours in the Boom, published this year. "But on the investment side, be careful."
So investors might keep in mind the old adage: In a gold rush, only the sellers of picks and axes are sure to profit. In the nano-rush, that would be the makers of microscopes and design software. Both FEI Co. (FEI ), in Hillsboro, Ore., and Veeco Instruments Inc. (VECO ), in Woodbury, N.Y., which make the powerful microscopes and energy-beam devices used to probe ultratiny structures, figure to grow with the industry. Plus, they already run sound businesses selling science lab instruments and chip-inspection devices. In San Diego, Accelrys Inc. (ACCL ) is a leading maker of the software tools that help scientists visualize how molecules interact.
To profit from actual nanotech products, the best bets may be companies with a diverse catalog of projects. Arrowhead Research Corp.'s (ARWR ) strategy is to fund university R&D -- now mostly at Stanford University and the California Institute of Technology -- in return for the rights to any inventions. The Pasadena (Calif.) company's projects include finding ways to use very tiny molecules to cut drug toxicity and developing new methods to make computer chips.
Countless more nano-products are brewing inside an estimated 1,300 or so startups. One way to invest in them is through Harris & Harris Group Inc. (TINY ), a NASDAQ-listed venture-capital firm that holds stakes in several market leaders. These include Nanosys Inc., which canceled a much-anticipated initial public offering last summer as the market fell; computer-memory developer Nantero Inc.; and Nanomix Inc., which is pursuing ultrasensitive sensors for industrial and medical markets.
The least risky route is to invest in the old-line technology giants that have big presences in nanotech. BASF (BF ), Dow Chemical (DOW ), DuPont (DD ), General Electric (GE ), Hewlett-Packard (HPQ ), IBM (IBM ), and NEC (NIPNY ) hold most of the basic nanotech patents. Established companies spent an estimated $3.8 billion on nanotech last year, making them the largest private funders of nanotech R&D, says Peter Hébert, CEO of Lux Research Inc., a New York market consultancy. Given their experience in bringing new technologies to market, corporate labs may dominate this sector, he adds. For investors, the downside is that any gains in nanotech will initially account for just a sliver of the blue chips' earnings and have a limited impact on their shares.
Any new nanotech IPOs are sure to unleash a fresh wave of hype, pulling up existing stocks. At the same time, the field remains so immature that sell-offs are sure to follow, as investors sort out incremental advances from market-changing innovations. Indeed, the few nano-enhancements already for sale, such as stainproof fabrics, highly durable paints, and lighter sports rackets, are just evolutionary, says Nanotech Co.'s Brookstein. "The revolutionary -- new types of materials, cancer treatments, and flat panel displays -- won't begin for another four to 10 years," he says. Till then, this very small technology will continue to inspire very big dreams.
By Adam Aston