Today’s commentary provides a few quick hits on some topics I am seeing in the technology space.
After a horrible drying up of liquidity after the technology bubble burst 14 years ago, we have seen a resurgence of the technology space over the past several years. While many parts of the US economy are still suffering, the tech sector is plowing ahead buoyed by tremendous amounts of liquidity both for pre-IPO companies and in public markets.
If I could point to two trends of note that stand out, they would be the following. First, there is a bifurcation in markets right now. Large and slower-growing established players like Google, Apple, Cisco Systems and Microsoft, some of which were bubble stocks in the tech bubble, are not seeing anywhere near the explosive surge in shares that other less established players have seen. To the degree there is a bubble in technology developing, it is not hitting the likes of Oracle, Ebay, HP or Qualcomm. Yes, these companies have relatively high multiples compared to the overall market. But their growth is also higher. They are not bubble stocks by any means.
On that score, a lot of this makes sense. A recent McKinsey study found that high-growth companies give investors returns that are five times greater than even medium-growth companies. So, right there you can see why we have this bifurcation. Some of these high growth companies are going to zero. But the ones that survive are going to be massive winners for their investors. And given the dynamism in the technology sector, there are a lot of options to choose from, just as there were during the Internet bubble days. And with all the liquidity chasing high returns for the few that will survive the inevitable shakeout, a ‘bubble’ is all but inevitable. I would argue, we are already seeing one.
Second, mobile is where the action is. The switch to a multi-computing device world is well-established in developed economies. And that means both consumers and business professionals alike want access to the same data across different devices, different form factors and in different locations. The result is a mobile-centric, cloud based revamping of existing business models and a whole host of new companies that have sprung up to fill this space. The reason we see Alibaba and JB.com with gargantuan price tags is because they are not only mobile-centric, but also because China’s mobile revenue is now passing the US and the adoption curve there means huge growth compared to developed economy mobile markets. If it’s mobile- or cloud-based, it gets funded first, gets a higher valuation, and has higher growth prospects. Deep penetration into untapped markets like China is a bonus.
I think these two factors – the high versus medium-growth dichotomy and the mobile space land grab – are the dominating macro trends that I see shaping the landscape. The mobile land grab is in fact an echo of the original internet land grab 15 years ago – and that’s why many of the dynamics are the same.
Here are some secondary topics I am seeing.
Wearables. I am a data nut. So 6 or 7 years ago I got a Polar watch with a heart rate monitor (HRM). The goal was to get a full kit strapped onto my bike to record data for my rides: distance, speed, cadence, altitude, heart rate, etc. Over time I switched and upgraded to two Garmin GPS watches but am now using my mobile GPS with a Bluetooth HRM and a tracking program like Garmin Connect, RunKeeper or Endomondo. There are tons of these programs out there.
What I am seeing, both through my own use and in the proliferation of these programs, is a move into wearables that has the mobile phone as the dominant form factor. I gave up on the next GPS watch upgrade because I could do everything with my mobile with almost no incremental cost. This is the same consideration that has driven the consumer camera market decline and the end of the PDA. Just as computer operating systems became more sophisticated and subsumed more and more ancillary tasks into the OS, mobile devices are becoming mini computers that are taking on more and more applications. The bottom line is that I see wearables as a limited space, driven by the mobile phone form factor and the cloud-based apps associated with it. All of these wearables we are seeing now will die out unless they have non-replicable functionality.
Mobile Disintermediation. One of the big changes that mobile brings to the table is disntermediation. Price check apps, mobile taxi apps, you name it. If we are moving to a cloud-based world based on mobile technology, that invariably means markets which are based on some level of oligopoly pricing are going to come under attack simply because we now have the means to end-run around those markets. Uber and the taxi cartels are a perfect example of this. Yes, there are issues with safety and regulation. But the reality is that taxi fares are elevated by the rationing of taxi licenses. Less supply translates into higher prices.
I anticipate more and more disintermediation, from Hailo to Airbnb to Hotel Tonight and on down the list. Regulation is not going to make the problem go away. The transparency of the internet and its ubiquity via mobile devices makes disintermediation an ever-present phenomenon that is going to bring price pressure to bear on existing business models. What this will mean for the owners of physical assets is unclear, but clearly, from a balance sheet perspective, owning expensive physical assets will mean lower margins in a disintermediated space and that will mean bankruptcy for the most overleveraged or least well positioned players, especially in a cyclical downturn. The hotel industry comes to mind here.
I am going to leave it there for today. But I look forward to updating you on the tech space because it is one vertical I like to discuss and that I have experience in that is doing really well in today’s economy.