14 February 2016
The 2011 McKinsey statistic that as many as 100 million jobs would be lost to automation over a 10-year period propelled artificial intelligence (AI) into the headlines. And it has stayed there ever since. Deep machine learning – the technology that allows Netflix to deliver viewing recommendations that you might actually want to watch – has proven revolutionary for customised service and enriching the user experience. The result: increased engagement, which leads to increased sales. In the retail space, Amazon is the AI leader, with retargeting advertising technology diligently following you around the web and suggesting things you might like to buy (just in case you forgot).
Big-name companies are so far the prominent adopters of AI technology, as they own enormous data sets that particularly benefit from the system optimisation delivered through AI technology. Amazon, Facebook, Google and Microsoft are proving the pioneers in utilising AI benefits to enhance the user experience and keep customers shopping.
Everything that excites us in technology has a storage angle to it, and the supply and demand ratio is tightening up. For the first time in 11 years we have seen an increase in the price of the base material of memory chips (silicon wafers), while there has been a doubling in the stock price of some memory names since 2015 as demand ramps up. Micron reported very strong earnings in December, raised its quarterly outlook and has guided on profit margins of up to 34%. Sector peer Western Digital also upped its earnings guidance. The market has underestimated the force of the storage theme in 2017. Many investors are shy to return to the theme after the downturn in 2015 – driven by falling emerging market PC sales – but sharp share price rises are making the storage appeal hard to resist.
Only 1% of global IT spend currently goes to cloud resources. But with more than 60% of new software implementations requiring cloud infrastructure to support them, companies will have to increase their spend in order to support the software of the future. Enterprises are finally getting serious about mass migrating infrastructure to the cloud. According to a Bernstein survey, the portion of CIOs saying public cloud will be a meaningful part of their IT estate in five years has gone from 24% to 51% in the last 12 months. Microsoft and Amazon are offering attractive ways to gain exposure, with the latter predicted to have equal IT services and retail revenues by the early 2020s, with the IT business being distinctly more profitable.
Growth vs Value
‘Growth’ stocks have been so driven down against their ‘value’ peers over the past 24 months that a reversal seems certain. Google and Facebook are currently trading on cheaper 2018 earnings multiples than the large-cap ‘old-tech’ names Microsoft and Texas Instruments – a seemingly unsustainable scenario. President Donald Trump could cause a shift in market direction toward growth stocks by driving the reflation trade and contributing toward a more risk-on environment, compensating for any interest rate increases. History suggests that when growth does return to favour the return potential is extremely positive. When this shift last occurred in 2013 we saw stellar outperformance of growth names, and 2017 looks set to deliver a fresh shift.
Security is regaining its prominence. In a world where mobile devices proliferate and more of our workload migrates to the cloud, it is getting harder to prevent cyber-attacks through fixed-border protection. Much like the physical world, detection and response become far more relevant than prevention. Data is the key here for differentiating between the winning and losing stock names. For example, Symantec has 30 million consumer users, 175 million enterprise endpoints and over three trillion lines of threat code in its database, adding 250,000 every second, giving it an industry-leading ‘big data’ advantage on threat detection.
Customer Lifecycle Management
Encompassing digital advertising, this theme has evolved toward total customer lifecycle management. This includes how customers are managed and retained once they engage with an advert all the way through to the end of the consumption cycle. Customer management has always been handled in a very modular way: CRM, advertising, marketing, customer support etc. But there is a strong push to offer end-to-end solutions. Traditionally only linked to advertising budgets, customer lifecycle management now covers total marketing spend, which is in excess of USD 1 trillion globally. Companies like Facebook and Google are heavily invested, as well as Salesforce, Pegasystems and Adobe.
And Where Not To Invest In 2017...
The stream of headlines on new handsets, foldable screens, virtual reality, drones and the connected home is unabating, but these are evolutions rather than revolutions. While it is easy to get excited about things we can see and touch, and harder to be so enthusiastic about lines of code, what matters most is the software and applications that run on these devices that play to our need for sensory perception. Software is the glue, and the language of communication and interaction is what matters – the hardware will become of less and less value.
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Nothing in this material constitutes investment, legal, accounting or tax advice and should not be construed as a solicitation, offer or recommendation to acquire or dispose of any investment or to engage in any other transaction. The statements and opinions in this material are those of the author at the time of publication and may not reflect his/her views thereafter. The companies listed were selected by the author to assist the reader in better understanding the themes presented. The companies included are not necessarily held by any portfolio or represent any recommendations by the author.