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

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

Changing landscape of US large and mid caps

Blue skies for consumers, caution for investors

banner

Most viewed in recent weeks

Lessons when a fund manager of the year is down 25%

Every successful fund manager suffers periods of underperformance, and investors who jump from fund to fund chasing results are likely to do badly. Selecting a manager is a long-term decision but what else?

2022 election survey results: disillusion and disappointment

In almost 1,000 responses, our readers differ in voting intentions versus polling of the general population, but they have little doubt who will win and there is widespread disappointment with our politics.

Welcome to Firstlinks Election Edition 458

At around 10.30pm on Saturday night, Scott Morrison called Anthony Albanese to concede defeat in the 2022 election. As voting continued the next day, it became likely that Labor would reach the magic number of 76 seats to form a majority government.   

  • 19 May 2022

Betting markets as election predictors

Believe it or not, betting agencies are in the business of making money, not predicting outcomes. Is there anything we can learn from the current odds on the election results?

Keep mandatory super pension drawdowns halved

The Transfer Balance Cap limits the tax concessions available in super pension funds, removing the need for large, compulsory drawdowns. Plus there are no requirements to draw money out of an accumulation fund.

Welcome to Firstlinks Edition 455 with weekend update

The resolve of many investors to focus on the long term with their share portfolios is increasingly tested as the list of negatives lengthens. There is a lack of visionary policies during an election campaign and stimulatory spending is contradicting the aims of tighter monetary policy.

  • 28 April 2022

Latest Updates

In praise of our unique democracy and its sausage

For all the shortcomings of our political campaigns, our election process is the best. We are blessed with honest administrators and procedures that we all trust to hand over power peacefully, with a big snag. 

Investment strategies

Is the investing landscape really different this time?

Many market analysts argue that the pandemic has changed everything but we must judge whether the circumstances are as drastic as billed. A quick review of four major events helps decide if this time is different.

Economy

Comparing generations and the nine dimensions of our well-being

Using the nine dimensions of well-being used by the OECD, and dividing Australians into Baby Boomers, Generation Xers or Millennials, it is surprisingly easy to identify the winners and losers for most dimensions.

Retirement

When will I retire? Economic impact of an ageing population

About 39% of the labour force is aged over 45. Intergenerational reports highlight the challenges of an ageing population and the impacts on consumption patterns, dependencies, public finances and economic growth.

The real story behind the crypto crash

The recent sell-off in the crypto market and its trigger - the collapse of the Terra UST coin - has affected many institutions either holding or trading crypto assets, including crypto fund managers.

Investment strategies

Cash is the nightingale, the bird in the hand

The bird in the hand is worth two in the bush, and it's an apt metaphor for investment choices. In 2021, as investors hunted in the bush for decent returns, demand overwhelmed supply. Cash is the bird in the hand.

Strategy

Book review of 'Putin’s People' and his motivation for war

Author Catherine Belton argues Putin’s sole ambition is to hold onto power. Her book seeks to understand why Putin invaded Ukraine after he became isolated and out of touch with reality during the pandemic.

Sponsors

Alliances

© 2022 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. Any general advice or ‘regulated financial advice’ under New Zealand law has been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892) and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. For more information refer to our Financial Services Guide (AU) and Financial Advice Provider Disclosure Statement (NZ). 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.

Website Development by Master Publisher.