Investing in Adoption Cycles
Gennadiy Velichko Investment Process Gennadiy Velichko
At Generation, we look for undervalued businesses with competitive advantages, high returns on invested capital, long runways for growth, and strong leadership teams that are aligned with the interests of long-term shareholders. One approach to practicing this investment philosophy is to identify upcoming product or service adoption cycles, and then find the highest quality companies that are positioned as some of the prime beneficiaries of these inflection points, thereby enabling us to capture emerging sources of value and compound capital at attractive risk-adjusted returns. The technology sector has been an active area of focus for us as it is home to many businesses with these attributes.
The Internet has changed the world profoundly, and yet it has been less than three decades since Tim Berners-Lee developed the World Wide Web. Such a short period of time suggests that we are still in the early innings of the Internet Age and a massive digital transformation of human civilization that will span the 21st century and beyond. Less than 60% of the global population is online and billions of people have yet to access the Internet for the first time. While North America and Europe have Internet penetration rates over 80%, Latin America, the Middle East, Asia, and Africa have penetration rates of 69%, 68%, 54%, and 40%, respectively. Telecom infrastructure investments, falling smartphone prices, the emergence of satellite constellation Internet service models, and humanity’s drive for a better way of life will increasingly close the gap with the West.
5G, the fifth generation of cellular network technology, while technologically and geographically constrained for the time being, promises exponential improvements in latency, throughput, traffic, spectrum efficiency, and density. It is estimated that there are only 11 million 5G smartphone subscribers worldwide, which is not even a dent in the global 5 billion unique mobile subscriber base. Nevertheless, Ericsson estimates that 5G subscriptions are set to grow exponentially to over 1.8 billion by the mid-2020s, with almost two thirds of subscriptions coming from Asia. 5G has the potential to enhance existing and emerging Internet business models, and at the same time facilitate the mass adoption of future technologies like autonomous vehicles that demand superior Internet infrastructure.
Other than knowledge-intensive industries such as IT, media, finance, and professional services, most other sectors around the world are just beginning to embrace digitalization and connectivity. Only 14% of retail sales were online in 2019 according to eMarketer, and Worldpay estimates that mobile payments and e-wallets have less than 20% global share of payment methods. Emerging technologies like Internet-of-Things (IoT), blockchain, machine learning (ML), and artificial intelligence (AI) are still at the beginning of their adoption curves. The number of connected things is set to explode from about 16 billion devices today to over 275 billion by the mid-2030s, while the blockchain market, at just $1 – 2 billion today, is estimated to grow to almost half a trillion by 2030 as finance and logistics companies move onto a more efficient and secure transaction architecture. The runways for growth are significant.
AI and ML will create significant productivity and efficiency improvements for businesses around the world. According to IDC, the AI systems market was just at $37.5 billion in 2019, but accelerating at a high-20% five-year CAGR in what McKinsey believes to be an upcoming adoption S-curve. More than half of AI and ML spend in 2019 will come from banking, healthcare, manufacturing, professional services, and retail sectors, and ultimately AI and ML will be infused into, and will change, every industry over the next decade. The total addressable market is reasonably within a multi-trillion range as AI and ML will automate labor, augment existing models, substitute legacy models, and extend product and service capabilities through new innovations like robotics. McKinsey pegs AI to deliver additional economic activity of around $13 trillion by 2030.
While opportunities abound in emerging technologies, business fundamentals and valuation must remain front and centre. High profile busts like Blue Apron and WeWork demonstrate that exciting technology alone cannot hide fundamentally flawed business models indefinitely. On the extreme end, before WeWork’s implosion, former CEO Adam Neumann stated that, “our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.” Such statements depart from rational investing and are a leadership red flag. An intensive research approach is thus necessary to distinguish between the dross and the diamonds of the field, and with the NASDAQ near all-time highs, consideration of value and fundamentals is paramount.
Gennadiy Velichko
Associate Portfolio Manager
DISCLAIMER
The information contained herein is for informational and reference purposes only and shall not be construed to constitute any form of investment advice. Nothing contained herein shall constitute an offer, solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. Investment accounts and funds managed by Generation PMCA Corp. may or may not continue to hold any of the securities mentioned. Generation PMCA Corp., its affiliates and/or their respective officers, directors, employees or shareholders may from time to time acquire, hold or sell securities mentioned.
The information contained herein may change at any time and we have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this presentation. It should not be assumed that any of the securities transactions or holdings mentioned were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities mentioned. Past performance is no guarantee of future results and future returns are not guaranteed.
The information contained herein does not take into consideration the investment objectives, financial situation or specific needs of any particular person. Generation PMCA Corp. has not taken any steps to ensure that any securities or investment strategies mentioned are suitable for any particular investor. The information contained herein must not be used, or relied upon, for the purposes of any investment decisions, in substitution for the exercise of independent judgment. The information contained herein has been drawn from sources which we believe to be reliable; however, its accuracy or completeness is not guaranteed. We make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained herein. We expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained herein.
All products and services provided by Generation PMCA Corp. are subject to the respective agreements and applicable terms governing their use. The investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. Nothing herein shall constitute an offer or solicitation to anyone in any jurisdiction where such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation.
At Generation, we look for undervalued businesses with competitive advantages, high returns on invested capital, long runways for growth, and strong leadership teams that are aligned with the interests of long-term shareholders. One approach to practicing this investment philosophy is to identify upcoming product or service adoption cycles, and then find the highest quality companies that are positioned as some of the prime beneficiaries of these inflection points, thereby enabling us to capture emerging sources of value and compound capital at attractive risk-adjusted returns. The technology sector has been an active area of focus for us as it is home to many businesses with these attributes.
The Internet has changed the world profoundly, and yet it has been less than three decades since Tim Berners-Lee developed the World Wide Web. Such a short period of time suggests that we are still in the early innings of the Internet Age and a massive digital transformation of human civilization that will span the 21st century and beyond. Less than 60% of the global population is online and billions of people have yet to access the Internet for the first time. While North America and Europe have Internet penetration rates over 80%, Latin America, the Middle East, Asia, and Africa have penetration rates of 69%, 68%, 54%, and 40%, respectively. Telecom infrastructure investments, falling smartphone prices, the emergence of satellite constellation Internet service models, and humanity’s drive for a better way of life will increasingly close the gap with the West.
5G, the fifth generation of cellular network technology, while technologically and geographically constrained for the time being, promises exponential improvements in latency, throughput, traffic, spectrum efficiency, and density. It is estimated that there are only 11 million 5G smartphone subscribers worldwide, which is not even a dent in the global 5 billion unique mobile subscriber base. Nevertheless, Ericsson estimates that 5G subscriptions are set to grow exponentially to over 1.8 billion by the mid-2020s, with almost two thirds of subscriptions coming from Asia. 5G has the potential to enhance existing and emerging Internet business models, and at the same time facilitate the mass adoption of future technologies like autonomous vehicles that demand superior Internet infrastructure.
Other than knowledge-intensive industries such as IT, media, finance, and professional services, most other sectors around the world are just beginning to embrace digitalization and connectivity. Only 14% of retail sales were online in 2019 according to eMarketer, and Worldpay estimates that mobile payments and e-wallets have less than 20% global share of payment methods. Emerging technologies like Internet-of-Things (IoT), blockchain, machine learning (ML), and artificial intelligence (AI) are still at the beginning of their adoption curves. The number of connected things is set to explode from about 16 billion devices today to over 275 billion by the mid-2030s, while the blockchain market, at just $1 – 2 billion today, is estimated to grow to almost half a trillion by 2030 as finance and logistics companies move onto a more efficient and secure transaction architecture. The runways for growth are significant.
AI and ML will create significant productivity and efficiency improvements for businesses around the world. According to IDC, the AI systems market was just at $37.5 billion in 2019, but accelerating at a high-20% five-year CAGR in what McKinsey believes to be an upcoming adoption S-curve. More than half of AI and ML spend in 2019 will come from banking, healthcare, manufacturing, professional services, and retail sectors, and ultimately AI and ML will be infused into, and will change, every industry over the next decade. The total addressable market is reasonably within a multi-trillion range as AI and ML will automate labor, augment existing models, substitute legacy models, and extend product and service capabilities through new innovations like robotics. McKinsey pegs AI to deliver additional economic activity of around $13 trillion by 2030.
While opportunities abound in emerging technologies, business fundamentals and valuation must remain front and centre. High profile busts like Blue Apron and WeWork demonstrate that exciting technology alone cannot hide fundamentally flawed business models indefinitely. On the extreme end, before WeWork’s implosion, former CEO Adam Neumann stated that, “our valuation and size today are much more based on our energy and spirituality than it is on a multiple of revenue.” Such statements depart from rational investing and are a leadership red flag. An intensive research approach is thus necessary to distinguish between the dross and the diamonds of the field, and with the NASDAQ near all-time highs, consideration of value and fundamentals is paramount.
DISCLAIMER
The information contained herein is for informational and reference purposes only and shall not be construed to constitute any form of investment advice. Nothing contained herein shall constitute an offer, solicitation, recommendation or endorsement to buy or sell any security or other financial instrument. Investment accounts and funds managed by Generation PMCA Corp. may or may not continue to hold any of the securities mentioned. Generation PMCA Corp., its affiliates and/or their respective officers, directors, employees or shareholders may from time to time acquire, hold or sell securities mentioned.
The information contained herein may change at any time and we have no obligation to update the information contained herein and may make investment decisions that are inconsistent with the views expressed in this presentation. It should not be assumed that any of the securities transactions or holdings mentioned were or will prove to be profitable, or that the investment decisions we make in the future will be profitable or will equal the investment performance of the securities mentioned. Past performance is no guarantee of future results and future returns are not guaranteed.
The information contained herein does not take into consideration the investment objectives, financial situation or specific needs of any particular person. Generation PMCA Corp. has not taken any steps to ensure that any securities or investment strategies mentioned are suitable for any particular investor. The information contained herein must not be used, or relied upon, for the purposes of any investment decisions, in substitution for the exercise of independent judgment. The information contained herein has been drawn from sources which we believe to be reliable; however, its accuracy or completeness is not guaranteed. We make no representation or warranties as to the accuracy, completeness or timeliness of the information, text, graphics or other items contained herein. We expressly disclaim all liability for errors or omissions in, or the misuse or misinterpretation of, any information contained herein.
All products and services provided by Generation PMCA Corp. are subject to the respective agreements and applicable terms governing their use. The investment products and services referred to herein are only available to investors in certain jurisdictions where they may be legally offered and to certain investors who are qualified according to the laws of the applicable jurisdiction. Nothing herein shall constitute an offer or solicitation to anyone in any jurisdiction where such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such a solicitation.