Good tech firms rise because they create new value. 15 years ago, Amazon was a mystery – what was the point in a delivery company not making any money? Apple was building a niche with new gizmos like the iPod, while Facebook was one of many banal social media sites we could hook up on. Uber and AirBnB didn’t exist. If you wanted to watch a film before the video was released, you went to Blockbuster.
Now, these same tech firms are worth trillions – because they created entirely new markets and new revenue streams. They carry substantial growth premia: Facebook consumed its rivals while its targeted advertising becomes more sophisticated allowing it to rake in money. Apple has become the most valuable company on the planet – by creating an ecosystem of IOS addicts to buy its constantly upgraded models that haven’t innovated anything fundamentally new in 10 years. Amazon is indispensable as the place stuff comes from. Google is successfully monetising every aspect of our lives. And Netflix…Netflix is an outlier. It’s great. My family couldn’t live without it – anything is better than watching the BBC news. Although Netflix invented the concept of a streaming service, it’s now just one among many. When Disney launched its streaming service in 2019, it was able to attract more subscribers faster – because streaming demands great content. If you want great content, Disney has it in spades. Netflix invented streaming, but Disney will dominate.
Generally, the success of companies that innovate new markets underlies their initial success. It also causes hype – when every investor thinks every new exciting tech launch is going to replicate the success of Amazon or Apple, it’s wise to remember tulip markets and step back and consider. This year’s big story has been ZOOM – worth billions because everyone on the planet suddenly learnt it exists and started using videoconferencing.
Or how about the blowout record-making IPO success of Snowflake – the cloud-computing solutions provider? Snowflake competes in a very crowded market. Its rivals have been making very healthy billion-dollar profits for a number of years. One firm, 40-year old Teradata, makes $2 bn revenues from its cloud activities and is valued at $2.5 bn. But brand-new Snowflake makes $250 million revenues, runs at a loss and is worth $80 billion – despite doing essentially the same thing as profitable Teradata. But Snowflake is new – and investors seem to be believing the old market lie: “this one is different”.
Tesla is a bubble. But it's one that, thus far, hasn’t popped.
Nothing illustrates the hopes and expectations that drive tech stocks as well as Tesla. It’s a fascinating company. It has created an entirely new market in electric vehicles, and it also dominates the battery tech. It is successfully making and selling cars and setting the market’s agenda.
There are two different views on Tesla:
There is the “you don’t understand” perspective favoured by the Tesla fan-club. They have some good points. They stress Tesla is a long-term play on the future not just of cars, but everything about capacitance (batteries), personal transport and power. It’s created and taken leadership of the expanding non-ICE (Internal Combustion Engine) market. It’s got proven battery technology and it’s collected massive amounts of data that will enable to lead autonomous driving – enabling Tesla owners to run their precious cars as self-driving taxis when they aren’t using them. The Tesla fans say the traditional financial markets don’t understand what massive future value the firm has created.
The market clearly believes in Tesla. It’s worth over $400 bn dollars despite making less than $1 bn profit in the last 12 months (the first time it’s ever posted an annual profit). While most car companies trade on modest single-digit multiples, the market clearly believes in Tesla’s exceptionalism at a plus 400 multiple.
Even though it produces less than 0.5% of global auto sales, Tesla is worth 2.5 times as much as Toyota which builds over 10% of the world’s cars, each year posting healthy profits of $23 bn on 10 times multiple. The big three US auto companies make 18 million cars per annum and post profits most years.
The unbelievers say Tesla’s minuscule profits after 10 years of developing their car model means it’s just a small niche player. They say it’s too reliant on selling carbon-regulatory certificates – every car it sells is sold at a loss. Ferrari makes 23% margin on each car while Tesla loses money. Naysayers don’t believe the hype around batteries – pointing our newer, cleaner battery tech, which can charge in seconds, will make every Tesla obsolete overnight; sometime in the future. They say Tesla’s batteries, actually made by Panasonic, won’t set the industry standard. The Chinese are saying they already have million-mile batteries, and although Tesla got a Chinese factory up and running in record time, the Chinese are outselling it.
Even sceptical financial analysts accept that Tesla makes good cars, but they believe that it needs to massively increase its margin per car and increase production at least 10 times to justify a stock price even half of its current value. In short - Tesla is a bubble. But it's one that, thus far, hasn’t popped.
But it will.
What’s driven Tesla to such stratospheric values is a result of some extraordinary factors. Founder Elon Musk is regarded by fans as a far-sighted prophet of genius. To detractors, he’s an arrogant market manipulator, hypester and snake-oil purveyor. Musk attracts the hopes and dreams of retail investors who are jumping on board the Tesla party bus. Good luck to them.
The main issue Tesla fans are missing is the same thing that is going to test Netflix and a host of other overpriced tech stocks: Competition.
Every other automaker gets what Tesla is doing. So far no one is doing it better. Someday, very soon, someone is going to launch something better. It might not be anything like Tesla, or it might just be much, much less hyped.
*DISCLAIMER: The content is for informational purposes only and should not be construed as financial advice. Nothing contained in this article constitutes a solicitation, recommendation, endorsement, or offer by Graham Norton-Standen, HIG, Finance Monthly or any third-party service provider to buy or sell any securities or other financial instruments.
The COVID-19 pandemic has created countless global issues during the past few months. Yet, more and more will soon come to light in the months ahead, and one particular issue that I am now witnessing is the new battleground between the ‘oldies’ and the ‘digitals’.
The ‘oldies’ in my book are represented by the regimes of governments, administrations and the leviathans of establishments and institutions of our past. These ‘oldies’ could not wait to close down their borders and forget any formal or informal ‘groups’ such as the EU and the World Health Organisation (WHO) as soon as the COVID-19 pandemic arrived on their doorstep. They simply shut their doors and told the rest of the world to go away.
The ‘digitals’ are the new breed of organisations that do not acknowledge borders. These digitals were at the same time already looking at a completely different picture, that of global collaboration and finding relationships to assist in creating long term successes for a future for all of us as well as for themselves, of course.
The contrast of old fashioned geographic borders and governance, is almost alien in a digital world that sees no borders, does not even think in the same way and deliberately sees the future with expectation, continuous change and recognising COVID as part of the new normal – and therefore works to find ways around it, within it, and using it, to create and adapt to a safer world.
Collaboration, global, no borders, and communities based on no tribal issues of the past. The only tribes for the future are which of the digital tribes you choose to use for your client interface into a world of everything.
Today we are now looking at the future as companies and governments make substantial changes in how they live, survive and grow and probably all based on how they use the future of digital to move forwards.
It is still a shame to hear governments focusing on their borders, their rights, their decisions, and their mistakes – all related to where we have come from and where we are – and still referring to a time “after COVID when we will return to our old norm”.
Sometime soon, we will be looking back to where we were as the time digital really did create a new way into our future world where our children and the world come together to embrace the future together – in communities that have no borders, no restraints and no issues, except to exist together.
A digital environment that will be much more about how to live everywhere and not about where you came from.
Therefore, we are here to look at digital stocks that can be the part of the successors in the market. Some of these digital groups are also old and grew up around the old rule books, however, most will adapt to the future much easier than the markets today and the rules and regulations that were built when words like blockchain, cryptocurrencies, clouds and 5G were words of dreams to come and not the future we are now in presently.
Therefore for the benefit of the administrations that still exist at this time, let us look at some of the digital stocks that we believe can not only work through this but grow and flourish in the future…and also deal with some of the political and government-driven issues for today.
If we look at digital stocks from the perspective of the ‘old’ geographical administration, then we would, therefore, have to accept the anti-trust of Chinese technologies and its government, which is causing ripples throughout the world (including for the Chinese), as well as countries from the western hemisphere and impacting a number of technology companies – in both directions.
It is interesting to be sitting here, in London, England, using a Chinese made IBM machine and sending the notes through a Chinese made 220 Megabits 5G system in a country that has suddenly decided that it is wrong to deal with China.
However, we also are still in the midst of ‘what is and where is COVID-19 going’, which has created its own global impact on all types of companies and people. With these factors in mind, we have been looking more at stocks which are resilient, established, global and ones that are benefitting from and taking advantage of the entire environment.
In reviewing this, ‘we’ as a team, are collaborating on this stock pick together, and are avoiding FinTech as there are many companies in the sector which should be addressed separately. So, for this article, we chose four that stand out.
COVID has turned companies into remote working clouds of staff which suddenly required the ability to be able to work efficiently and effectively from home. VPN’s were opened up and laptops purchased in bulk leading to many shortages of stock. Microsoft has been developing their Office 365 suite for a number of years and a wonderful example is how Microsoft Teams was built on Skype for business. It was the perfect timing of advertising Teams, which is free with Office 365 plans, which then led to vast uptake from businesses of many sizes. This, hand in hand with a security flaw in Zoom, meant that CISOs were pushing for the migration to the 365 platform in droves. With many businesses deciding that remote working is actually good for them, it seems that Microsoft are rocketing through the uptake of their platform, along with a long-anticipated and imminent release of Teams 2020. One potential impact to Microsoft could be the negative sentiments regarding datacentre technologies and the potential life after the big cloud providers; however, we think they are certainly in a good position for now.
Dynatrace provides software intelligence to simplify enterprise cloud complexity and accelerate digital transformation. This company has been on my radar for a while now. Early versions were quite clunky, but the technology has matured very well. They have pulled in a nice selection of Enterprise clients, boosting their profile in the technology sector. With the fact that more cloud solutions are being implemented daily, Dynatrace is becoming a powerhouse of monitoring solutions. Add to this their maturing AI service, Davis and they are now reducing the requirements on Network Operations Centres (NOCs), meaning return on investment (ROI) is quite rapid. Again, COVID-19 is likely to boost sales with the migration of enterprise solutions and infrastructure to the cloud.
Akamai Technologies Inc (AKAM) is a global content delivery network that also specialises in cloud services and cybersecurity. This is an interesting one for me and I’m currently able to take advantage of the increase in cloud deployments and cybersecurity threats. In 2019, Akamai partnered with Microsoft to integrate into the Azure platform for their Content Delivery Network (CDN) and with a targeted approach to credential threats, they are in a very good position to leverage the current COVID-19 landscape. Why? Because as many have witnessed, the increase of remote workers and cloud users has provided a perfect opportunity for cybercriminals to exploit.
Tower Semiconductor (NASDAQ/TASE: TSEM) manufactures integrated circuits using speciality process technologies, including SiGe, BiCMOS, SOI, mixed-signal and RFCMOS, CMOS image sensors, non-imaging sensors, power management, and non-volatile memory as well as MEMS capabilities. With the increasing migration of computation to edge (on device), we are going to place vast demands on devices, data centres and infrastructure as a whole. With 5G looming and even in place in certain environments, the demands are only going to increase. Manufacturing systems are fast adopting IoT and this will exponentially increase demand too. Tower Semiconductor are developing ultra-fast products to deliver the speed required both now and into the future. With the increase of home workers too, they are in a very good position.
One of the major issues in the future will be: Where will the ‘oldies’ fit in the new ‘digital’ world, and that in itself is a much more politically focused debate. However, it does raise a question that will also be relevant for all commercial businesses today.
How much further can an old and fixed slow governance system formed around a geographic border keep up with where the world is going now? How does it adapt itself to a much more globally needed relationship in partnership and collaboration for the benefits of all in this world?
Perhaps in our near future and for the first time, the ‘oldies’ should be ready to shuck off its old clothes and start swimming and leading for the future of a truly global business and personal community for everyone.
And that means that doing deals with companies from countries that provide the very best technologies.