Disruptive technologies and Disrupted industries

Overview of technology industry

I have recently picked up Philip fisher's common stocks and uncommon profits and attempted to understand his long term relationship / fascination with the technology companies of his time (Texas instruments, Motorola). Fisher's 15 points is the distilled essence of his experiences over the years, and I see some core elements used as the bedrock of Warren Buffet's criteria / checklist for selecting outstanding companies. 

I will categories myself as a GARP (growth at reasonable price) investor.Growth and value is joint at the hip and I will only consider buying relatively undervalued companies that I understand in depth with a reasonable growth rate. My investing style is largely influenced by Peter Lynch, Warren Buffet and John Templeton. Ironically, my aversion of high tech companies also stemmed from their beliefs and experiences in the technology booms and busts from their era. The technology industry is littered with the corpses of has-beens. The categories are as follows. 

Firstly, there are businesses that are insufficiently capitalized to produce and develop great products to lead to profitability (flop at venture capital and seed finding stage). Those which are capitalized di-wosified and overpaid for too many unrelated M&A that it is ill equipped to manage, or over leveraged to seek inorganic growth, and cannot survive drastic changes in economic conditions.

Secondary, there are big cannon fairies whom are proficient in creating incredible narratives which does not translate to the actual product and service provided (most cryptocurrency).

Thirdly, there are some companies whom managed to achieve both, but is unable to protect their technology moat / intellectual property rights and have their products duplicated / improved on by innovators. 

I) Creative had their MP3 plagiarized by Apple. Despite winning the lawsuit eventually, the window of opportunity for explosive growth had passed them by and MP3 fell into technological obsolescence. I am not sure if the same story will be repeated with their new sound chips. 

II) Apple / Microsoft / Samsung are constantly monitoring each others products and cross pollinate ideas in their smartphones and tablets . Companies with technology leadership is in turn is copied by China Oppo / XiaoMi / Huawei which has cost leadership. 

III) Facebook copying Snap-chat in their stories function, when people discovered sharing their personal life on Facebook on a permanent basis is not a great idea. Ten cent is the ultimate copier and trying to integrate everything to creating a we-chat ecosystem / super app.

Fourthly, the ability to generate sales revenue does not necessary lead to ability to generate profit. Business conditions can shift drastically within short periods of time and it is difficult even for talented CEOs to make the correct business call. 

I) Amazon is an incredible company whom Miraculously managed to grow to impressive market cap while loss making, and somehow manage to appease its amazingly patient shareholders . It is transiting from a low capex business to buying physical warehouses and delivery infrastructure.

II) Facebook has impressive MAU but the advertising / monetization strategy is unstable and subject to rapidly shifting consumer trends. It transited from a casual gaming company to a timeline (social media) platform, and now transitioning to VR and Moments. Monetization of messenger and whatsapp is under way and the revenue / business structure will evolve rapidly within a few years time. 

III) Alphabet / google has transitioning beyond search engine capabilities and is building on an entire ecosystem, and entrenching users into it. Gmail, Google Maps, YouTube, Google Drive has a virtual monopoly in the European region to the point of violating EU antitrust laws and incurring fines . Nonetheless, it is transitioning to development of physical inventory like Pixar phone, autonomous vehicles as well as VR headsets.

Future trajectory of disruptive technologies

I have went to republic polytechnic on 31 Oct to attend a technology fair. The future tech products showcased have much more mundane but predictable and realizable commercial value especially in the aviation and logistics industry. RP is currently collaborating with lecturers to obtain funding to create research prototypes, with the possibility of getting RP students to take on some parts of their research / project. Just in this fair alone, I can have a glimpse of what the future might be like, although the challenges of duplicate innovations / solutions is apparent even in this small space. 

1) Logistics
Autonomous Moving palettes (forklifts and palettes replacements)

Autonomous vehicles transporting goods within the compound

Middleman software to integrate / manage IOT with inventory management software.

Digital Weighing scales that can be calibrated to count inventory by weight

Narrow-band IOT for inventory replenishment processes

Drones (navigating inaccessible areas)

2) Training
Augmented reality to conduct training

Virtual reality headsets for hands on training (ST engineering - SAF scenario simulation for protection of key installations)

Utilization of touch screen to simulate actual systems, and other screens to simulate high level workflow 

3) Automation of manual labor

Automated chefs

Automated floor cleaning devices (without use of driver)
Medicine dispensing at lockers, for patients to collect at designated collection points.

Present Disruptive technologies and Disrupted industries

With the strong push by the government and globalized MNCs to embrace technology to reduce manpower overheads and increase operational efficiency, it is indeed troubling for workers whom will be made technical obsolete. From my understanding, operational workflow that does not require human trust and largely repeatable workflow will be aggressively automated or outsourced to cheaper vendors. 

Fast food restaurants and FMCG players have automated their payments and order taking systems. 

Chat-bots are replacing BAU operations and inquiry routing for accounts opening and client facing teams in the finance industry. US banks and local banks have declared the obsolescence of the traditional teller role, to be wholly replaced by ATMs and electronic tellers. 

Traditional brokerage industry is surviving on razor thin trading commission and largely automated via straight through processing. 

Hospitals will be automating appointment making and queue number checking. Disbursement of medicine can be automated via self collection points. Routine medical consultations could be done at home via video conferences, and medical apparatus have their readings routed to doctors electronically. 

ST engineering, ten-cent and alphabet is developing self driving Cars and buses. Grab and Uber are leading these initiatives and the moat of vehicle rental business (Comfort) is under serious threat. 

Refining my selection process for growth companies

1) Porter 5 forces as investment moat. PEST and SWOT analysis to understand the Marco and micro fundamentals. Analyze each company on a case by case basis as technology companies can have dramatically different business models! (Respective BAT and FANG stocks) 

2) Avoid companies engages in price wars. Buy companies that sells the fuel that drives the flame. Buy utility technology companies that benefit regardless of shifting economic trends. 

3) Strong financials. Manageable debt. Strong quality and volume of operating cash flow and free cash flow. Strong and increasing profit margin. Low / Reasonable PE and PEG

4) Ability to retain clients and generate profit instead of just sales revenue and MAU (Leaky bucket model and retained client base) 

5) Qualitative analysis and Buffet checklist approach. Distinguish fads (one off) from core services. Do not invest in the company if you cannot explain how it can continually generate profits for the next 5-10 years. 

6) Understand shareholder structure to prevent abusing of minority shareholders. Strong corporate governance and shareholder - manager orientation. Do not invest in companies that have doubtful accounting quality and standards. 

7) Understand that Investing in an ongoing process and change in trends are inevitable. Charlie Munger commented that Berkshire Hathaway has evolved from contrarian investor to market influencer, and buying airlines, railroads (change in capex requirements and unduly low valuation) and Apple (consumer behavior thesis) that it has frowned upon in its earlier years. This is an acknowledgement that industries and valuation methods evolve with technology and circumstances.

8) Always do your own due diligence. Research sufficiently so you can be confident enough to be contrarian. Nonetheless, be humble enough to diversify sufficiently and use portfolio management tools to manage downside risks. 

Links
https://www.oldschoolvalue.com/blog/investing-perspective/15-points-to-look-for-in-a-common-stock/
https://www.stengg.com/en/products-solutions/iris
https://www.stengg.com/en/electronics/st-electronics-training-simulation-systems