Blain: "We Are Beginning To See Cracks Across The Tech Model"

Submitted by Bill Blain of Mint Partners

Irish border? Tech/Disruptive valuations - are they unsustainable? Wake up and put on the coffee.

“The man gave me the news. He said, you must be joking son, where did you get these shoes?”

Extraordinary weather here in London. This is the first time I’ve worn a Panama hat in April since 1976. Just last week I was still wearing my winter Fedora! One ponders just what the cooling Gulf Stream and the renegade Jet Stream are doing to us? Photo of view from office window attached. (Barclays office facilities – please take note.. this morning the world is looking thru your dirty windows..!)

The paucity of real market moving news is demonstrated by the headlines given over to the latest Brexit Spat – the Irish border. There are simple solutions – but no one seems particularly interested when it’s a chance for Brussels to punish Britain, Remoaners to bleat about how it’s never too late to repent, while Exiteers fulminate on the need to discipline Europe. Get real. Call it a free-trade zone or whatever. Does anyone really believe the UK and Yoorp will so diverge that Irish Milk will be different from Northern Irish Milk? Aside from arbing petrol prices either side of the border, (which is only 195-215 miles long, depending which map you use), isn’t it best to be practical? Get on with it. 

Back on planet Rest of the World, a very real issue is tech stocks. Their market caps are enormous. 7/10 of the largest companies on the planet fall into the bracket. They dominate global indices, and account for much of ebb and flow of market value activity.

The raises some very big issues, not the least of which is valuations – where me-too investors and investment tourists have piled in. Do the current prices make sense? The conventional wisdom/excuse is you can’t value disruption/paradigm shifts from a conventional perspective. It requires an acknowledgement that extraordinary breakthroughs need to analysed and priced differently. They glitter, they shine, they sound good… so folk buy em – none of which are valid investment reasons!

Amazon has become the proverbial shoe in the retail high street machine (incidentaly the origin of the word “saboteur”). The rise of Amazon conveniently explains the death of the high street and shopping mall, triggers a devaluation of these sectors and expectations the Amazon monopoly can only expand for ever on the basis populations will always consume. Of course its not limitless.

We are beginning to see cracks across the Tech model. Facebook is just one. The implied IP potential of big data collectors was assumed likely to provide annuity-like earnings and rising revenue into perpetuity.. Right up to the moment when it became clear the question of ownership of personal data had never been tested, and now a regulatory threat hangs over the whole sector. Valuations based on free big data no longer apply. Reprice accordingly?  Folk are still thinking of buying opportunities based on what looks a discredited series of expectations.

Or how about the fact i-Phones seem not to obey Boyles law? Although the Iphone “improves” every year, prices are still going up and up and up. Boyles law states “capacity/speed doubles and prices half” every few years. Hmm.. The utility of the iPhone has hardly changed since it became the dominant smart phone. The memory is about the same, but Prices keep rising! Despite the marginally better camera, and slightly shinier shiny white thing, the sum of human happiness has hardly risen as result… and now everyone has one..

The IMF recognises this. In its latest “World Economic Outlook, April 2018, Cyclical Upswing, Structural Change” report, Page 34 states the tech cycle in smartphones has overturned everything we learnt from personal computers. Every two years (or so) we get a spike in i-Phone parts orders followed by a spike in sales as a new shinier glossy version of the bright-shiny new new thang hits the street. The effect is incredible – a massive boost to the manufacturing countries in terms of parts, while in Ireland (where its all booked, but hardly taxed) iPhone payments account for a massive portion of GDP!

The pre-release cycle as production ramps up, and then the post-release cycle as the initial surge in “must have new phone” demand wanes, are worthy of an economic study in their own right. But, the IMF note we actually saw a decline in global shipments for the first time ever late last year. Does that mean the economic driver effects of Smartphone cycles could be in question? Does the price always rises equation break down?

And then there is Tesla. Sure, it’s the Electric Vehicle everyone wants and the market leading EV. We’re told its battery technology prices will obey Boyle’s law, making the car increasingly affordable, while the current production problems are just speedbumps as it approaches the unconstrained motorway. But, by the time it gets there the rest of the Auto-verse will be producing equally good EVs. Will Tesla retain its multiples then? Sure it may remain a leading EV producer, but is that valuation and multiples sustainable??

What would the saturation of the smart-phone market, or a wake up moment in Electric cars, mean across Tech sector valuations – not just in terms of Apple and Tesla, but in terms of all the other smart Disruptive Tech wonders we’ve bought into? For instance, Amazon works: yesterday I took delivery of new window boxes for the London Flat, but I also declined to buy some art materials I need - I’d rather go to a specialist art shop to choose and pick the materials I need. While I might buy a t-shirt off the net, I’ll be choosing my next tweed suit from a tailor.

Tech promises much... but does disruption deliver limitless returns? Nope... nothing moves as much as you think it might. It all convinces me to look at investment returns in a conventional way: real assets, real returns… buy stuff rather than concepts.