Of Unicorns and Bubbles

In addition to profiling the story of the Oculus acquisition by Facebook, Vanity Fair recently featured articles about Unicorns (billion-dollar valuation start-ups), and the technology bubble. Current valuations are (again!) brought about by 7 years of easy money, where you have too much money chasing after assets. This can be good and bad: the abundance of capital has encouraged more people to come out to build companies; however, those that truly add value to our economy, or are profitable, are few and far between.

For an idea of how bubbly the sector is, take Jet.com. The brash four month old e-commerce startup out to take on Amazon.com raised $225m at a $600m valuation, and is going for another round at a $3b valuation! (See WSJ article)

If this is not a bubble, what is? The names are not without reason: Unicorns are mythical and bubbles have to pop sometime. What investors could do would be to understand the companies' business models and financials, if they are truly sustainable and defensible. Are the companies going after something faddish, that can be done without, or something essential, a technology that has the potential to change the world? The man on the street should also ensure that his income is not fully dependent on errand running start-ups, taxi disrupters, or freelance internet work. 

Around half of dot-com era companies such as Amazon and ebay survived the last crash to emerge as the tech behemoths they are today. Perhaps the best test for the companies would be the bursting of this bubble with more rounds of financing, as it would purge the wannabes or "unicorpses", and leave the strongest standing. Another way would be for them to be to go to market, where they will have to reveal their performance numbers and investors can then ascribe a true value to them. The rest of us will just have to be wary as we watch this bubble grow. 

In search of real growth - Part 2

Here are the next 5 sectors with the potential to propel the American/Global economy into the next decade...

6. Virtual reality (VR)

After the very high profile acquisition of VR headset maker Oculus for $2b by Facebook, Oculus has since launched a mobile VR device with Samsung. Almost at the same time of the acquisition, Sony announced a VR device for its PS4 gaming console, named Project Morpheus. Google is also dabbling with VR by coming up with a low-cost, self assembled headset, Google Cardboard, as well as teaming up with GoPro to create Jump, a 'spherical-video' camera. Nokia came up with a virtual reality camera for making immersive films, TV and games, while VR start-up Jaunt received $65m from investors, including Walt Disney. Apart from entertainment purposes, VR has numerous possibilities for uses in aerospace, education, manufacturing, and industries.

Facebook acquired VR headset maker, Oculus for $2b in March 2014

7. 3D printing

3D printing, aka additive manufacturing, is the next revolution in manufacturing; it will enable the personalized manufacturing of items from jewelry, aircraft parts, precision engineering, architecture, and medical devices at no minimum quantity. The production of prototypes can be done in a matter of days, reducing costs, increasing productivity, and opening opportunities for smaller companies.

Traditional supply chains will also be disrupted via virtual warehousing, which means parts are digitally stored and manufactured only on demand, replacing the current approach of storing thousands of physical parts in warehouses. Witness the shift to the Long Tail, or from mass production to made-on-demand customization. However, the technology has yet to achieve high speeds and quality, which could explain its slow rate of mainstream adoption.

Recently, listed 3D printers such as Stratasys and 3D systems have gone into a slump. This is possibly due to the weight of expectations pressuring the companies into spending more, leading to a contraction in their margins. Likely a long term investment opportunity if 3D printing achieves mainstream acceptance as it has been touted to. HP Inc, the hardware segment of HP, is also making its foray into the industry via their Multi Jet Fusion machines by end 2016.

3D printing: print yourself...or anything!

8. Robotics

Robotics include drones, automation, and Artificial Intelligence (AI). There is reason to be concerned: an Oxford study predicted that 47% of all employment in the US is likely to be automated by 2030; Scientists, researchers, and academics, including Elon Musk and Stephen Hawking, have warned that your Hollywood movie of an AI arms race might come true if autonomous weapons are developed. For less innocuous uses, count on the usual suspects like Apple, Google, Amazon, Microsoft and Facebook to develop machines that chat with you, or drones to deliver your parcel. Google in 2014 paid more than $500m to acquire AI startup DeepMind in the UK. The latest is that Apple bought 2 AI companies in 4 days, snapping up Perceptio, an image recognition technology for smartphones, and VocalIQ, a UK based startup with technology to help computers understand human speech.

The Amazon drone delivering your parcel 

9. Fintech

Financial technology, or Fintech, is making the Banks sweat. Ranging from peer-to-peer foreign exchange/lending/funding, to online payments, to the Bitcoin/Blockchain, fintech startups are picking off the most lucrative parts of the banks' relationships with customers, leaving them as just dumb providers of capital. Apart from the listed Paypal, here is a list of fintech startups to watch. In this list, Square is due to IPO by the end 2015.

And of course, the Bitcoin, or its underlying Blockchain technology (distributed record of any bitcoin transaction ever traded), cannot be ignored after it was announced that 22 major banks have invested in New York fintech firm R3 to create a framework for Blockchain technology in markets; and that Blythe Masters, former head of commodities at JP Morgan, joined Digital Asset Holdings to design software that can make financial transactions more efficient with blockchain technology. More on Bitcoin/Blockchain in another post.

10. Quantum computing

Quantum computing overcomes the limitations of today's computers by applying quantum mechanics to increase computing capacity significantly. Rather than the usual 1 and 0 bits, the qubits in a quantum computer can be in both states at the same time, massively increasing the number of possibilities that can be analysed simultaneously. This means optimising large volumes of data, making advances in AI, where computers can be taught to solve problems and understand language, pattern recognition, and financial analysis. Along with NASA, Google has been testing a system made by Canadian company, D-wave Systems, which claims to have built the first working quantum computer.

The D-Wave quantum computer 

The usual suspects, Social Media, E-commerce, and the Apple/Android application ecosystem have already upended the traditional industries (mainstream media, retail) and will continue to grow and create jobs/value. Notably, Google is involved in 8 out of 10 of the above mentioned sectors!

No matter the state of the economy, we can be comforted that humans have always been able to progress through reinvention, innovation, and adaptability. Would appreciate hearing your thoughts, or if you could help add on to anything I might have missed!

In search of real growth - Part 1

As highlighted in my previous post, QE, or printing money, cannot be a source of real or long-term growth. Instead of depending on injected steroids, the economy will have to depend on some real muscle to achieve sustainable growth.

These sectors and their related companies seem to be the diamonds amongst the rubble (or bubbles), and are the rising stars; they are likely to be the sectors with the greatest job creation, as well as the catalysts of growth for the American/global economy for the next decade...

1. Big data/Internet of things

On the premise that there is value in data; data can be mined to understand relationships, predict trends, and save costs. Think Palantir and Cloudera who receive million dollar contracts from governments/corporations to study and store data. For the Internet of things, which relies on Big Data, Nest, which was acquired for $3.2b by Google in the beginning of 2014, will revolutionize the ways things work at home.

2. TV

We are witnessing the demise of cable. Instead, count on the internet to serve up your favorite shows to your TV. This will mean higher subscription revenues for the likes of Apple, Netflix, and Amazon. Netflix and Amazon have also started producing their own (award-wining) content to wean off media companies such as 21st Century Fox and Time Warner Inc, while also increasing their scale of distribution and margins. Attractively priced devices such as Apple TV, Google's Chromecast, and Amazon Fire stick will also increase the adoption for these internet TV services.

House of cards*, just one of the award winning series by Netflix.

*House of cards was not made by Netflix, but owned and produced by film and TV studio Media Rights Capital. The first season was then sold to Comcast Corp for on-demand rights. Still, it was a milestone in Netflix's successful foray into making and owning original content. 

3. Sharing economy 

The sharing economy not only redefined employment, it has also unlocked asset value by providing asset owners with additional sources of income. We wait with baited breath as Uber and AirBnB inch closer towards their mega-listings. The ultimate combination: Google invested $258m in Uber...imagine them ruling the roads with driverless cabs!

Possibilities from the Sharing Economy

4. Electric cars

Pump prices may be low, but that is not stopping the adoption of electric cars as supporting infrastructure (i.e. charging stations) is being rolled out. Even at an exorbitant price tag, there is still a waiting list for the the latest Tesla X model. Not to be left behind, BMW, and General Motors are racing to develop their own models. Warren Buffet invested in BYD, while Chinese billionaire Lu Guanqiu revived Fisker Automotive (Tesla's nemesis) as Karma Automotive with a $139m injection. Now, Apple wants to get into the game too. It is also a matter of time before the chasm is crossed and there is widespread adoption.

The Tesla model X with its X-wing doors presented by its visionary founder, Elon Musk

5. Life Sciences

Imagine being able to know where your health is headed, detect disease early, and understanding your DNA for ancestry or hereditary diseases. Theranos, 23andme are among the companies making it happen. Google, under its umbrella structure, Alphabet, has a Life Sciences division investing in various projects and has also invested in 23andme and biotechnology venture, Calico. According to Angelina Jolie, who underwent preventive double mastectomy after tests revealed she was at high risk of ovarian/breast cancer, " knowledge is power".

These are the first 5 sectors, I will continue with another 5 sectors in my next post...

The ills of easy money

The US and Europe have been trying to revive their economies through Quantitative Easing(QE) policies. However, we are now witnessing the repercussions of their actions. See interview with billionaire activist Carl Icahn.

In the past 7 years, the money created has flooded financial markets in the guise of higher stock prices, but have hardly permeated the real economy, or got to the Man on the Street. Property and stocks have been inflated by excess money chasing after limited assets, and borrowing against inflated assets will only make this bubble even bigger.

Note that the job of the Fed is to manage inflation, but not assets. However, this misguided effort has led mainly to the inflation of assets, but not demand or prices. John Burbank of Passport Capital hit the nail on the head with this remark:

"QE had caused a misallocation of capital across the world, while the end of QE last year triggered a dollar rally with consequences that were only now beginning to be realised. The wrong people got the capital — emerging markets countries and corporates and a lot of cyclical companies like mining and energy, particularly shale companies — and this is now a major problem for the credit markets,” he said.

QE has in fact, gone against its purpose, leading to declining prices from an imbalance between an excess of supply from Asia and a drop in demand from the West - Overleveraging has led to overcapacity that is driving down prices (read: China).

So, where will real growth come from? And what can we put our bets on? I will highlight some of these promising sectors in my next post...