Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 273

Investing in global disruption, four years on

When Loftus Peak first began taking investor funds four years ago, there was a perception that smartphones and Google searches meant the world was hooked up and the big disruption money had already been made in the sharemarket, so further pickings would be slim.

But that is not the way it went. Facebook closed above US$38 a share on its first day of listing in 2013, halved thereafter, and then went up 10 times to more than US$200 on the back of the company’s successful shift to mobile (after a panic that the company could not make the leap from the desktop).

Markets struggle with long horizons

Markets react to visibility and can struggle to ascribe value beyond a two-year horizon. The sheer size of some of the disruptive themes might help understand the dilemma markets face in correctly valuing the affected companies; that is, all companies.

There are secular trends that will not reach their addressable market size in a single quarter but will keep expanding faster than GDP for years to come. For example, one of the strangest valuation anomalies was Alibaba, which investors thought was fully valued based on its hold on the Chinese e-commerce market. That market is already bigger than the US, is growing faster and has several years before it hits maturity, as the chart below shows. The stock has doubled since listing.

These big trends - such as energy as a technology (not a fuel), networks, connected devices (sometimes called the internet of things) and mega-data - will play out over decades. Single-period valuation methodologies such as price-to-earnings are too inexact, but it is a statistical certainty that 10-year forecasts will be wrong, too.

What has become clear is that such longer-term thinking when combined with other key metrics provides 'less wrong' valuation parameters compared with concentrating the investment horizon to one or two years, which can lead to a game of valuation catch-up. For example, there are serious problems in the world of central processor unit (CPU) chips. You shouldn’t be reading this here first, but Gordon Moore’s law that the number of transistors on a chip doubles every 18 months, is now breaking down.

It isn’t the CPU that will make computers go faster, it is graphics processor units and the like. They will not just double the speed, their advent into the data centre will mean an over 10-fold hike. Moore’s law drove disruption, but it is not fit for purpose from here. It will be different architectures that make processing speeds faster, thus increasing the pace of change.

Intel itself has acknowledged this, stating in 2015 that the pace of advancement has slowed. Brian Krzanich, the former CEO of Intel, announced: “Our cadence today is closer to two and a half years than two.”

Greg Yeric, chip designer at rival ARM, says:

“As Moore’s law slows down, we are being forced to make tough choices between the three key metrics of power, performance and cost. Not all end-users will be best served by one particular answer.”

This thematic will not play out in one year. It has already taken half a decade and is only halfway through.

Investing in global megatrends

There is an interesting line between being a disruption investor relative to that of a technology investor, meaning that it is more important to understand Moore’s law, not because it leads to smaller chips but because of what new business models arise as a consequence.

The chart below shows the growth of smartphones, a direct result of Moore’s law, but also their relationship to retail ecommerce (as a proportion of all retail), a disruptive business that was not necessarily foreseeable.

The relationship between retail e-commerce and smartphone penetration

Copyright © 2017 The Nielsen Company

It's not only about increasing processing speeds

It is the same with 5G. The technology itself may not be investable, but the changed business models that arise from it may be. For example, all the fancy processor power rolled out in the past 50 years could not even cope with a YouTube cat video until broadband speeds – meaning money in fibre and cell towers – caught up on a national and international scale. If self-driving cars become ubiquitous, it will be because there is 5G processing power, with the attendant massive real time data-transfer rates, to help steer them safely.

Meanwhile, Amazon has built a web services company that is at least as valuable as its US retail business and is now close to having an unassailable lead in voice, with the stock up five times in four years.

Voice is the next battleground in search, and both Google and Apple are behind Amazon in its execution here. We think about how this will impact business models on a multi-year horizon. And it isn’t because of the machine learning tools that drive voice, but the business implications of having an Alexa device in your home organising your shopping.

And so it is with Netflix. The company is not just an entertainment service, its model threatens to upend networks and pay-TV as we know them, globally. The fact that there are no real barriers to entry other than capital, for Hollywood film studios to create competitors to Netflix, has not stopped them from completely missing the point about the company and its role as a cable-TV killer.

Disney and Comcast were beating each other over the head to double down on old media by trying to buy 21st Century Fox for more than US$60 billion – a bid in which Disney won, at a cost of US$71.3 billion – presumably on the principle that scale will solve bad per unit economics, but it won’t.

What they should be spending that money on is great content, which is what’s really keeping Netflix’s share price moving. AT&T sort of gets it with the acquisition of Time Warner but is going to wind up so leveraged it will not have the additional resources to bring the fight to Netflix, content-wise.

There are other developments across sectors as diverse as energy, finance, robotics and transport. Four years after we started in this company, we believe there is still return to be had from the sharemarket, provided we continue to focus on the important trends and keep an eye on valuation. This remains our daily focus.

 

Alex Pollak is Chief Executive, CIO and Founder of, and Anshu Sharma is Portfolio Manager at, Loftus Peak. This article is general information and does not consider the circumstances of any individual.

 

RELATED ARTICLES

Are expectations for the Magnificent Seven too high?

TV - the end of the world as we know it?

Changing landscape of US large and mid caps

banner

Most viewed in recent weeks

The nuts and bolts of family trusts

There are well over 800,000 family trusts in Australia, controlling more than $3 trillion of assets. Here's a guide on whether a family trust may have a place in your individual investment strategy.

Welcome to Firstlinks Edition 581 with weekend update

A recent industry event made me realise that a 30 year old investing trend could still have serious legs. Could it eventually pose a threat to two of Australia's biggest companies?

  • 10 October 2024

Preserving wealth through generations is hard

How have so many wealthy families through history managed to squander their fortunes? This looks at the lessons from these families and offers several solutions to making and keeping money over the long-term.

Welcome to Firstlinks Edition 583

Investing guru Howard Marks says he had two epiphanies while visiting Australia recently: the two major asset classes aren’t what you think they are, and one key decision matters above all else when building portfolios.

  • 24 October 2024

A big win for bank customers against scammers

A recent ruling from The Australian Financial Complaints Authority may herald a new era for financial scams. For the first time, a bank is being forced to reimburse a customer for the amount they were scammed.

The quirks of retirement planning with an age gap

A big age gap can make it harder to find a solution that works for both partners – financially and otherwise. Having a frank conversation about the future, and having it as early as possible, is essential.

Latest Updates

Planning

What will be your legacy?

As we get older, many of us start to think about how we’ll be remembered by those left behind. This looks at why that may not be the best strategy to ensure that you live life well and leave loved ones in good stead.

Economy

It's the cost of government, stupid

Australia's bloated government sector is every bit as responsible for our economic worries as the cost of living crisis. Grand schemes like the 'Future Made in Australia' only look set to make it worse.

SMSF strategies

A guide to valuing SMSF assets correctly

SMSF trustees are required to value all fund assets, including property, at market value when preparing the fund's financial statements each year. Here are some key tips to ensure that you get it right.

Economics

Australia is lucky the British were the first 'intruders'

British colonisation's Common Law system contributed to economic prosperity, in contrast to Latin America's lower wealth under Civil Law. It influenced capitalism's success in former British colonies, like Australia.

Economics

A significant shift in the jobs market

The expansion of the 'care sector' represents the most profound structural change to Australia's job market since the mining boom. This analyses how it's come about and the impact it will have on the economy.

Shares

Searching for value in tech stocks

Just because a stock is cheap doesn't necessarily make it good value. This uses case studies in the tech sector to help identify when stocks trading on 30x earnings may be inexpensive and when others on 10x may be value traps.

Investing

Are more informed investors prone to making poorer decisions?

Finance Professor Michael Finke recently discussed the double-edged sword of taking an interest in your investments, three predictors of panic selling, and why nurses tend to be better investors than doctors.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.