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How To Play The Next Tech Disruption Wave

Asia Confidential's picture




 

Three weeks ago, I outlined six key investment themes for the next decade. I neglected to mention one for wont of space and because I wanted to devote an entire post to it. Namely, further technological disruption to established industries. Everyone knows how the likes of retail and newspapers have been transformed by the internet. Well, there's much more to come as it's clear that supermarkets, healthcare and education are next in line for technological upheaval.

For instance, UK online grocer Ocado appears to have nailed an industrial scale pick and delivery model. For more than a decade, companies have tried and failed to make inroads into the online grocery business, the most notable failure being the 1990s internet-bubble inspired, Webvan. Through trial and error, Ocado seems to have mastered the notoriously difficult logistics involved in the business. And it will soon be out-doing supermarkets, offering a broader range of products, at lower prices and with the convenience of ordering via a simple click of the mouse. What Amazon did for books, Ocado is about to do for groceries.

As investors though, how can you take advantage of the emerging opportunities from the digital revolution? The obvious answer is through up-and-coming tech companies. But this is more difficult than many suppose. For every Facebook, there's a Myspace - the wannabe Facebook originally backed by media billionaire Rupert Murdoch - and hundreds of others. In other words, the creative destruction in tech is enormous and trying to pick winners requires extensive knowledge and a large dose of luck.

I'd argue that the best way to play future technological disruption is through companies servicing the key players. What I'd term: facilitators. They would seem to be surer bets. For example, the internet's transformation of retail and soon groceries means supply chains will need to quicken even further. Consumers are going to want goods delivered yesterday. That means quality logistics companies will be in high demand. And industrial warehouses near key airports and ports will be valued at a premium given increased demand for the fast turnaround of goods.

Today, Asia Confidential is going to discuss these opportunities and more, as well as the companies which are likely to benefit.

Digital revolution is just beginning 

There are many who think that tech is a gigantic bubble waiting to burst. You have the IPO of Twitter, a company being valued at US$13 billion and yet doesn't earn a cent. And on a larger scale, Amazon (Nasdaq: AMZN) is still loss marking despite sporting a US$166 billion market capitalisation.

Then you have the internet start-ups being sold for millions and the venture capitalists backing them becoming quasi celebrities. Not to mention that residential property in Silicon Valley is now one of the most expensive in the United States.

But before writing tech off as a bubble, a few things should give you pause. For one, many large tech companies are now cheap as they're considered yesterday's heroes. Apple (Nasdaq: AAPL) is valued at less than 10x earnings if you strip out its enormous cash pile, compared to the S&P 500 12-month forward price-to-earnings ratio (PER) of 16x. Similarly, Microsoft (Nasdaq: MSFT) is on a PER of just 11x. More broadly, the tech sector has actually under-performed the S&P 500 this year. And similar tech under-performance has been witnessed in my neighbourhood of Asia.

The other thing is that history suggests this may not be a bubble. The evolution of railways in conjunction with the industrial revolution in the 1800s resulted in a long series of stock market booms, aka bubbles. The creative destruction involved then was similar to that of tech today.

Finally, if you think about the history of the current digital revolution, you may appreciate the enormous opportunities which lay ahead. Go back to the 1990s and the enthusiasm generated by browser technology. Then there was the advent of domain names and portals as well as email and instant messaging reaching the masses. Domain names assumed less importance with the rise of search and the behemoth, Google. And increased bandwidth has since paved the way for a huge uplift in web traffic.

While the digital revolution has been largely confined to the web so far, that's starting to change as it moves into the real world. And that's where things are about to get interesting.

I've talked previously about how 3-D printing is transforming the world of manufacturing. Physical objects can be designed on laptops and the designs can be shared online as files. Factories have been able to do this for decades but the big change is that now anyone with a computer can do it.

There are other examples of how the internet is being applied to the real world. You'll know that smart phones are like quasi-computers these days. But do you know that each phone is uniquely identifiable on the internet? That is, the smart phone which may be in your hand right now has a mobile internet address. That means you can be connected to the internet 24/7. And companies can track your location via your device at any time.

One of Paypal's latest inventions is Beacon, which gives retailers the power to recognise Paypal members as they enter their store (or walking past) and for these members to be able to make a transaction with a phone swipe or simple nod of agreement. In other words, there's no need for these people to use credit cards or paper money. A virtual world, indeed. Needless to say, card issuers like Visa aren't happy about it.

Think about the broader implications of this though. Retail companies no longer have to lure you into their store via your laptop at home. They can track you in real-time to market business opportunities.

Next industries to be hit

There are tens of thousands of start-up internet companies which are currently targeting digital applications for the real world. The most vulnerable industries are likely to be those which don't offer the best prices, broad product ranges and convenience - or a combination of all three.

Online companies have been targeting supermarkets for the best part of 20 years. Everyone to date has tried and failed with an online grocery model. The most famous failure was Webvan, which went bankrupt in 2001 as the Nasdaq bubble burst. Amazon has also attempted to make headway in the space with AmazonFresh.  But to little avail.

Now, however, a UK company has emerged and appears as a genuine contender to take on the big supermarkets. Ocado (LON: OCDO) was formed by three former Goldman Sachs bankers in 2002. It received early backing from large UK department store operator John Lewis. And it listed in the UK in 2010 to much investor skepticism.

That skepticism is slowly dissipating though as the company is set to turn its first profit. It follows a huge 25-year deal with UK supermarket chain Wm Morrison to distribute online groceries. Ocado suggests overseas deals may flow from the Wm Morrison agreement.

Other sectors besides supermarkets also appear ripe for tech disruption. Education and healthcare are probably at the top of the list.

With education for instance, everyone know the enormous price inflation which has occurred across universities over the past 30 years. And yet education standards, particularly in the developed world, have shown minimal improvement during that time. What's worse is that many university graduates don't have the skills to get jobs in the current tough marketplace.

It doesn't take a genius to realise how online study could totally displace university lectures and tutorials. And slash university costs along the way. In essence, universities should soon turn into venues where students go to collaborate or discuss what they've learned online.

Emerging tech companies worth looking at

But now you're probably thinking: that's all great, but how do we, as investors, take advantage of this tech revolution? The easy answer to that is to find the next Google (Nasdaq: GOOG). Only, that's not so easy.

The U.S. offers some great tech companies, including Google itself as well as the likes of Ebay (Nasdaq: EBAY). These companies are innovators, with enormously scalable business models and generating prodigious amounts of cash.

Less known is that Asia also has some fantastic tech companies which probably offer even greater opportunities. China's version of Google, Baidu (Nasdaq: BIDU), is one. You also have Sina (Nasdaq: SINA), which owns the Chinese equivalent of Twitter. Then there's Youku (Nasdaq: YOKU), which you may have guessed is a wannabe Youtube in China.

There are many others which look just as interesting. I'd suggest Naver (KRX: 035420) in Korea is worth a look. It has a 70% share of search in South Korea. And it owns a social messaging service which has attracted more than 250 million users across Asia.

The problem that I have with investing in many of these tech companies is that it's extraordinarily difficult to predict how the digital revolution will evolve from here. And who the winners will be. If you're going to invest directly into tech companies, it'd be sound to spread your bets across a variety of companies, given this uncertain future.

But there may be a better way...

Better potential opportunities

Let me give you a rough analogy first. Unless you've lived in a cocoon for the past decade, you'll know about the enormous commodities boom which has taken place. Many mining companies generated an enormous amount of wealth. What's not publicised to the same degree is the number of failures during the period. I'd estimate 1000 failures for every success story.

Not only that, but even the largest miners wasted enormous amounts of cash on projects which has since been mothballed. Since the pullback in commodity prices from 2011, there's been much criticism about this and that's why you see the large mining companies cutting back on capital expenditure and promising to give more money back to shareholders via dividends (a revelation that's been a decade in the making!)

Anyhow, my point is that investing directly into the mining companies, even the large ones, was not the best bet. For instance, most of these companies trailed commodity indices by a distance.

The companies where investors made more money were those servicing the mining industry. The mining contractors. As well as others servicing the areas where new mines developed, such accommodation providers and so forth. These companies were surer, less risky, but more profitable investments.

I'd suggest that same thinking may be profitable in the digital world too. Rather than playing the tech companies directly, investing in those servicing the industry may have a better payoff.

I'll give you one example. Think about who else will benefit from the ongoing disruption in the retail sector. Inventory management and distribution have been, and will continue to be, crucial as the industry evolves. That means faster supply chains. To enable faster chains, logistics will be at a premium.

In addition, many distributors will prefer warehouses around key airports and ports, so goods can be turned around quickly to consumers across the country or abroad. That means real estate around key infrastructure should become more valuable given relative supply scarcity versus growing demand. And also ports themselves, particularly in oligopoly-type markets should also become more valuable as greater throughput occurs from quickening supply chains.

For logistics companies, you probably have to look to the U.S. as they're are few quality listed vehicles in Asia. The likes of UPS (NYSE: UPS) and Fedex (NYSE: FDX) would seem to have bright futures.

In terms of industrial real estate around key infrastructure, Goodman Group (ASX: GMG) in Australia and Mapletree Industrial (SGX: ME8U) in Singapore give you partial exposure to this. I also like the world's largest industrial property operator, Prologis (NYSE: PLD), in the U.S. It focuses purely on property near key infrastructure and is run by one of real estate's most brilliant minds, Hamid Moghadam.

For exposure to port operators La Ka-shing's Hutchison Whampoa (HKG: 13) is a great play not only on Hong Kong but European ports too. Chinese state-owned Cosco Pacific (HKG: 1199) also gives you exposure, though the quality of the company is questionable.

The above provides just a few examples of how to potentially invest in those facilitating the digital revolution.

This post was originally published at Asia Confidential: 
http://asiaconf.com/2013/10/27/playing-next-tech-disruption/

 

 

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Mon, 10/28/2013 - 12:42 | 4097995 SmittyinLA
SmittyinLA's picture

I figure with computer automation, ball screw & actuator manufacturers will take off along with energy suppliers, if a machine can replace a human for less money it will, invest in machinery component manufacturers, most of this stuff is "open source" too so you won't have to share with patent trolls either.

invest in economies of scale and efficiency.

You want to own an automated factory that puts humans out of work, machines can undercut even the cheapest 3rd world labor.

The investment required to replace human workers is dropping like a rock.

Mon, 10/28/2013 - 11:56 | 4097766 Ying-Yang
Ying-Yang's picture

Article... ? MEH

Mon, 10/28/2013 - 11:19 | 4097600 moneybots
moneybots's picture

"Less known is that Asia also has some fantastic tech companies which probably offer even greater opportunities. China's version of Google, Baidu (Nasdaq: BIDU), is one. You also have Sina (Nasdaq: SINA), which owns the Chinese equivalent of Twitter. Then there's Youku (Nasdaq: YOKU), which you may have guessed is a wannabe Youtube in China."

 

Looking at the charts, YOKU is as i write this, falling through its 50 ema and the 8 ema is about to cross down through the 20, which is also pointing down.  BIDU is just below the 20, having poked up through the 8 and fallen back today.  SINA has opened at the 50 ema, tried to run up to the 8 and failed, and is now below the 50 today.  The 8 has crossed under the 20 today.  Previously, price neared the 50 in September and bounced off the 50 on the 9th of October.  SINA is just above its oct. 9 low, while the Nasdaq is well above its Oct. 9 low.

Mon, 10/28/2013 - 11:02 | 4097541 moneybots
moneybots's picture

"But before writing tech off as a bubble, a few things should give you pause.  For one, many large tech companies are now cheap as they're considered yesterday's heroes"

 

It's the money, stupid.  Without Greenspan's money machine, the Nasdaq would never have gone to 5,000.

I remember someone saying somewhere around the top that tech could not crash because they had no debt.  The problem was that tech's customers had debt and thus tech crashed, as orders plunged after Y2K.

There will always be some company that invents an exciting new product or service, but the market is going up on cash flow from the FED, not because there is a great digital revolution occurring.

Greenspan says the market has moved up hugely, but is not bubbly.  When has he ever told the truth before?  If Greenspan dismisses a market as being a bubble, one has to asssume it IS a bubble.

 

 

Mon, 10/28/2013 - 08:22 | 4097022 RaceToTheBottom
RaceToTheBottom's picture

Sorry, I could not take your article seriously after I read that the three founders of the company you were pushing are ex GS employees.

I guess I will miss the next Amazon, but historically, the percentages say, don't deal with criminals.

Mon, 10/28/2013 - 05:32 | 4096902 Fuh Querada
Fuh Querada's picture

dup.

Mon, 10/28/2013 - 05:28 | 4096901 Fuh Querada
Fuh Querada's picture

Chinese fortune cookie say: You are hopelessly out of your league.

Mon, 10/28/2013 - 02:47 | 4096840 lewy14
lewy14's picture

Free newsletter.

Terrible value.

Mon, 10/28/2013 - 05:33 | 4096905 Fuh Querada
Fuh Querada's picture

you would need to spend hours per week checking the fraudulent financial statements of any single one of these companies

Mon, 10/28/2013 - 00:38 | 4096758 ItsDanger
ItsDanger's picture

For logistics, UPS & FedEx is typically smaller volume for air.  I would expect ground (excl sea) to be a wash.  The play is really going to be in larger volume for faster supply chains. 

Also, the big coming tech change is going to be around robotics.  Unfortunately, this will eliminate a great amount of lower end jobs.

Sun, 10/27/2013 - 23:42 | 4096706 the grateful un...
the grateful unemployed's picture

the first really big change is the end of personal consumer choices. the previous age was all about coke/pepsi, chevy/ford, its all a farce. fill a basket with whats fresh and in season. (i suggested to my chef friend he start a culinary gift box service, each month you send a package with different hand picked items, different packages to different people.)  choice is something the marketing mavens use to fool you into buying their stuff. most business competition is a fraud. truly unique things are hand made in small batches, not mass produced. but theres always someone ready to confuse the public, like sam adams beer. of course this isnt an investment theme, the real investment theme is gold as personal adornment. in ten years we'll all be dressed line NBA players or rap singers. and we will pick up our groceries and say uh huh, that looks interesting

Sun, 10/27/2013 - 21:48 | 4096472 orangegeek
orangegeek's picture

Three weeks ago, I outlined six key investment themes for the next decade.

 

Really?  Is this before or after "the world is fucked" investment wave?

Sun, 10/27/2013 - 17:19 | 4095827 remain calm
remain calm's picture

I suggest you invest in KY Jelly, because governments around the world are going to fuck us all in the ass real hard going forward.

Sun, 10/27/2013 - 21:34 | 4096425 Lets Buy The Dip
Lets Buy The Dip's picture

I had to +1 you correct.

Just look at the market, this guy here is very accurate => http://bit.ly/16F8sFU  is saying the BEARS will be reamed hard this week into FOMC meeting. OH dear. 

 

 

Sun, 10/27/2013 - 19:02 | 4096077 Carl Popper
Carl Popper's picture

Do not worry my sons. Unintended consequences go borh ways. We are heading toward a maker society where half or more of the value produced cannot be taxed. The government can only hasten such freedom with increasing rwgulations and increasing taxes as more and more people drop out of the taxable work force and start interacting locally with each other. I just made a nice coffee table from a pallet with instructions from the internet.

Tax that added value, motherfuckers.

Sun, 10/27/2013 - 22:19 | 4096551 Bear
Bear's picture

If that indeed happens at VAT on food will arise ... the Gov eats first at the trough

Sun, 10/27/2013 - 17:36 | 4095881 shovelhead
shovelhead's picture

Real men use 30W.

Mobil 1 synthetic if over 200,000 miles.

Mon, 10/28/2013 - 00:57 | 4096777 Boris Alatovkrap
Boris Alatovkrap's picture

Some is use oily fat extract from Yak, but Boris is not recommend because olfactory offensive and sticky residual.

Sun, 10/27/2013 - 16:30 | 4095734 disabledvet
disabledvet's picture

first off this is a very good title...and unlike what you hear on television these changes can measured, observed and are NOT fabrications. in other words there is nothing a "mere mortal" is going to do to change or alter the disruption. second and by far the easiest (and safest) way to play this game (and it is a "game" in the sense that these asset inflations are "gamed") is to simply buy into Wall Street. At the "buy low" side that consists of only two companies fer sure: Morgan Stanley and Citigroup. As an "outlier" or "flyer" I would also add GE. These folks already have a mass of inside information that you and I simply cannot trade on....but they can.....and do. the second way obviously is to buy something tangible with all this "free money" for lack of a better word. Sure...land, gold, an annuity. But why not a house? Why not a car? Why not a work of art? The only thing we can be certain of is that prices will reset higher (although investing vis a vis this thesis has been a total train wreck actually) so besides tangible equity you have to invest in free cash flow being discounted. this need not include equities at all actually but in fact can include a Government program. unlike "the flighty birds" of equities Government "assets" can have a very profound effect on "growth potential" that once built "don't collapse so easily." the most obvious one is the electrical grid and say...the Hoover Dam. let's say instead of just building locks the Fed's add electrical production too. Well, we already know Tesla is offering "free fuel for life" on their high end models. I see nothing to stop the Government from offering itself that same option for say a school or hospital. this option could be offered to both public and private institutions as well. Tesla obviously is a private company so the reality of it being offered to you and me is about as transparent as it gets. in other words "free fuel forever" insofar as transportation goes is on the table here. why would I ever even buy an ICE vehicle as a consequence?

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