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As the more senior amongst us may recall, these four iconic words were uttered by Arnold Schwarzenegger in Terminator 2, and, perhaps less memorably, by Boris Johnson in his final PMQs. While Arnie’s “I’ll be back” may (or may not) be related to his reputed $30 million fee for reprising his cyborg in Terminator 3, history is unfortunately littered with those for whom “hasta la vista” has been rather less of a “see you later” than a final goodbye.
The pace of technological innovation has been so relentless that it’s easy to overlook some of the casualties left in its wake. Sony launched the first Betamax video recorder in 1975 for the bargain price of $2,295 but fell by the wayside as the VHS format propelled JVC to victory (when many a happy Saturday night was spent perusing the shelves of Blockbuster Video.) It was all change again with the advent of the DVD, followed by the digital streaming revolution that helped propel Netflix into the premier league.
Staying on the topic of movie streaming, I was granted a temporary reprieve from the seemingly infinite library of sports documentaries last weekend to watch “Blackberry”, which documents the “meteoric rise and catastrophic demise” of the world's first smartphone. The company pioneered a hand-held device for emails and, at its peak, boasted 85 million customers, a 45% share of the smartphone market and a near $80bn market cap.
The crushing disappointment of the two founders was all too palpable when Steve Jobs’ now-infamous launch of the first iPhone in 2007 caused Blackberry’s fortunes to change almost overnight. Despite their best efforts to rush through a rival touchscreen device, it was game over and Blackberry’s market share fell to zero (with their market cap not faring much better).
The US tech behemoths may have deeper pockets than most but obsolescence remains a genuine threat for even the most dominant of market-leaders, a view echoed in our recent webinar series by Gervais Williams, manager of Miton UK MicroCap (MINI). Gervais spoke about the potential miscalibration of obsolescence risks faced by the magnificent seven and, as a result, whether this risk is adequately priced into current valuations.
While the technology sector has undoubtedly been on a blistering run of late, recent events might have set alarm bells ringing for some investors. Apple has leveraged its unwaveringly-loyal customer base to become a multi-trillion-dollar leviathan but Samsung pipped it to the post for the highest market share of the global mobile phone market in the first quarter of 2024.
Notably, this also marked the fifth consecutive quarter of falling revenue for Apple, including a 10% year-on-year drop in iPhone sales. With Apple’s share price recently hitting an all-time high, investor appetite remains undimmed for now but there’s a lot riding on the upcoming roll-out of its new AI tools.
And it’s the transformative potential of AI that’s been a key driver of the lofty valuations for the magnificent seven. Microsoft may have stolen a march on the competition with the launch of Chat-GPT but Alphabet was punished with a $100bn single-day drop in market cap after rival chatbot Bard fluffed its lines in a rushed-out product demo.
More recently, investors have been spooked by mixed results from Alphabet’s multi-billion pound AI investments, not helped by the litany of mistakes made by its new AI Overviews tool, including the questionable advice to glue cheese onto pizza to help it stick better (the error was later attributed to a decade-old satirical post on Reddit).
In his recent webinar, Christopher Berrier, manager of Brown Advisory US Smaller Companies (BASC), also talked about the challenge of the magnificent seven maintaining the growth rates underpinning current valuations, partly due to the law of large numbers (being easier to achieve higher growth from a smaller revenue base). If we add the risk of obsolescence into the mix, current valuations might just start to look a little extended relative to other assets.
One possible solution is to take a technology-agnostic approach by investing in the infrastructure that provides the backbone of digitalisation. The volume of global data has exploded, with 90% of data created in the last two years alone. This exponential growth is forecast to continue, supported by the rising popularity of cloud computing that provides companies with a limitless conveyor belt of best practice and innovation. As a result, the digital infrastructure sector enjoys some of the strongest secular growth drivers of any physical asset class.
As one of the few pure digital infrastructure plays, Cordiant Digital Infrastructure (CORD) aims to capitalise on this high-growth market to generate a total net return of 9% per annum, principally through capital growth. Cordiant owns five companies diversified across mobile towers, fibre-optic networks and cloud computing assets in Europe and North America. Capital growth is generated via a ‘buy, build and grow’ strategy of increasing utilisation and capacity, often via bolt-on acquisitions.
The managers’ mid-market expertise has enabled the acquisition of assets at EV/EBITDA multiples of around 8-14x, at a significant discount to the historic 20-30x multiples for $1bn plus single-sector assets (according to Liberum). This provides the foundation for the trust’s capital growth, including a near 50% uplift (as at 31/03/2024) in the valuation of Polish multi-asset provider Emitel since its acquisition in late 2022. Cordiant is one of the highest-performing trusts in the AIC Infrastructure sector with a three-year net asset value total return of 35% (as at 26/07/2024).
An alternative angle is via direct lending, historically the sole preserve of institutional investors but now offered by investment trusts who have tapped into the high-growth potential of the infrastructure sector. Infrastructure debt offers stable returns with the ability to pass through cost inflation, low cyclicality, a strong asset base and high barriers to entry.
Sequoia Economic Infrastructure Income (SEQI) aims to provide equity-like returns from private debt for infrastructure projects, with the backing of a highly-diversified portfolio of physical assets. SEQI holds a highly-defensive portfolio of BB/B credit quality investments, which commands a high yield due to the illiquidity and complexity of arranging private debt.
SEQI has exceeded its target return of 7-8% of net asset value in its last financial year (to 31/03/2024) with a five-year net asset value total return of 28% (as at 26/07/2024), largely via income.
While the magnificent seven are likely to remain a core holding in investors’ portfolios for some time to come, it’s worth reflecting whether current allocations reflect the inevitable (and mostly unavoidable) risk of obsolescence. And, on that note, it’s “hasta la vista baby” to Concorde, 118, Encyclopaedia Britannica, the Sony Walkman, Yellow Pages, iPods and too many other victims to mention.
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