|New Threads Only:|
|New Threads & Replies:|
Forum List » Guru News and Commentaries|
Guru News, Stock picks and commentaries
How Companies Are Using Technology to Win
Posted by: Robert Turner, CFA (IP Logged)
Date: September 4, 2012 03:30PM
A position paper by Bob Turner, chairman and chief investment officer, Turner Investments.Our position in brief
Technological innovation is driving modern business and is doing so at a quickening pace. As we see it, companies that develop new technologies generally stand the best chance of succeeding over time in their markets – and in the stock market. We identify a number of key technological innovations that are reshaping some of the market sectors we cover and companies that are applying those innovations well.
In 1968 the legendary physicist and Intel cofounder Gordon Moore conceived Moore's Law, based on the proposition that the number of transistors on a semiconductor chip doubles every two years. As we see it, Moore's Law has applicability not only to semiconductor technology but to other kinds of technologies as well. Companies accomplished at developing various types of technologies can reap two prime benefits. One, they can offer proprietary products and services that are perhaps the best source of competitive advantage. Two, they can position themselves well for long-term growth in their markets. Not surprisingly, as a result of those two benefits, they also tend to generate superior returns in the stock market in the long run.
Today technologies are riding an accelerating wave of innovation. Consider the soaring number of patent applications over the past three decades. Last year, the U.S. Patent and Trademark Office received 503,582 patent applications – 206% more applications than were filed in 1991.
In our judgment, embracing technology and the innovation it fosters is more critical than ever for companies in all of the stock-market sectors we cover. If companies in the 21st century have a commandment, it may very well be thou shalt innovate or thou shalt perish. A failure to innovate can result in firms quickly becoming contemporary equivalents of those companies that made horse carriages in the late 19th century.
Typically, technological innovation requires substantial spending on research and development. And not surprisingly, the best companies in each market sector tend to allocate a generous chunk of annual sales to their R&D budgets. In any sector, it can be fiendishly difficult to determine who will win or lose in the long run. But if you were forced today to choose which companies were likely to end up as winners five years from now, you could do worse than to pick those that spend amply on R&D. Our research has shown that leaders typically pour amounts ranging from 5% to 19% of their annual sales into R&D.
In light of all this, we thought it would be illuminating to show how some key technologies are driving progress and enhancing the fortunes of companies in a cross section of market sectors.
Key consumer-discretionary technologies:
m-commerce, mobile advertising, and digital distribution
In the consumer-discretionary sector, technology is contributing to three key trends: m-commerce, mobile advertising, and digital distribution.
Consumers are shopping more and more via their mobile devices, a practice known as "m-commerce" (a riff on e-commerce). During last year's holiday shopping season, retail sales from mobile devices reached 11% of the total, doubling from 5.5% a year earlier, according to IBM.
In the quest to make m-commerce more user-friendly, eBay (EBAY) (headquarters: San Jose, market capitalization: about $57 billion) acquired PayPal, a pioneer in online payments. The once-faltering eBay has revived its eclectic m-commerce empire by investing heavily in software development, especially software for mobile payments such as PayPal's. Also, Amazon.com (headquarters: Seattle, market capitalization: about $107 billion) continues to exploit its extensive cloud-computing infrastructure and digital-streaming capabilities for the Kindle electronic-book reader to bolster its own fast-growing m-commerce business.
Mobile advertising is starting to mature, led by Google (GOOG) (headquarters: Mountain View, California; market capitalization: about $218 billion). Until recently the mobile-advertising market wasn't especially lucrative: advertisers have traditionally been charged about 40% less for clicks on mobile ads than for those on Internet-search ads, according to research firm Stifel Nicolaus. But we think mobile ads are likely to narrow that price gap, and Google's dominant position in mobile ads (a 52% market share) should be an increasingly valuable asset for the company.
Digital distribution is all about content and the way consumers, ahem, consume it. Media companies like Time Warner own movies, music, and television programs, and they're looking for new ways to profit from that content, over and above the traditional distribution channels of movie theaters and television. New channels such as tablets and smartphones are helping media companies do exactly that and tap enormous new audiences worldwide. In the process Amazon.com, Google, and Netflix (headquarters: Los Gatos, California; market capitalization: about $3 billion) are becoming the new gatekeepers of media distribution, with the power to dictate the media hierarchy of the future.
Key financial-services technologies:
mobile payments and terminals
In the financial-services sector, technology may eventually make wallets passé. No, we're not suggesting that this will be a boon for the manufacturers of money clips, but we do believe it is encouraging news for firms advancing the state of the art in mobile-payments technology. Basically, mobile payments enable you to use your mobile device, such as a smartphone or a tablet computer, to make purchases (and handle your banking needs) without having to lug around cash. One important technology that's helping to make mobile-payments transactions possible is near-field communications, which expedites short-range communications between a target (like a smartphone) and a reader (like a point-of-sale terminal).
Mobile payments are expected to blossom into a $600-billion market by 2016, up from $172 billion this year, according to market-research firm Gartner. It's no wonder, then, that credit-card companies are jockeying for position in fledgling mobile-payments processing networks. To us, the mobile-payments industry resembles a school lunchroom filled with bullies: everyone is trying to eat each other's lunch.
In that struggle MasterCard (headquarters: Purchase, New York; market capitalization: about $53 billion) and Visa (headquarters: San Francisco, market capitalization: about $86 billion) have been intent on introducing mobile-payment solutions. Also, Discover Financial Services (headquarters: Riverwoods, Illinois; market capitalization: about $19 billion) has enlisted the help of wireless-network providers in creating Isis, a digital wallet created in concert with AT&T, Verizon Communications, and T-Mobile USA. Then there's Google, which is playing its familiar role of the Great Disruptor – in this case, with Google Wallet, which the credit-card companies are participating in.
We think that in its business of marketing point-of-sale terminals, VeriFone Systems (headquarters: San Jose, market capitalization: about $3.6 billion) is being shrewd in cultivating relationships with major retailers, in anticipation of mobile payments' future growth. VeriFone's proprietary terminals can do more than those of the competition, and no matter which companies emerge as winners in the digital-wallet battle – for now, we think it's too early to tell – they'll need VeriFone's hardware to do business.
Key health-care technologies:
robotics and cloud-computing software
In the health-care sector, it's not wallets that could become obsolete; it's scalpels. That's because robotic technology has advanced to the point where surgeons are increasingly using it as a primary tool in their operations. Robots are becoming as common in the operating room as pump soap and scrubs.
Intuitive Surgical (headquarters: Sunnyvale, California; market capitalization: about $20 billion) has cemented itself as the leader in robotic surgery with its da Vinci system (its market share is conservatively estimated at 80% by Wall Street analysts). Da Vinci's diminutive arms are guided by the surgeon's hands, which means the patient's body is invaded to a lesser degree than before. This leads to faster recovery times and better outcomes for patients, as well as more revenue for hospitals. Intuitive Surgical has a formidable moat of patents – more than 200 – around da Vinci technology, which has been instrumental in the remarkable growth of robotic surgery; growth has averaged about 30% annually since 2006, according to market-research firm IBISWorld.
Also, hospitals that are equipped with robots are applying cloud-computing technology to improve access to patients' medical records. Anyone who has switched primary-care physicians lately knows of the inefficiencies plaguing medical records. Since medical records are unavailable on a centrally managed database, patients are compelled to arrange for their records to be forwarded from one doctor to another – a laborious exercise that we think in retrospect will seem as outdated as traveling by stagecoach.
Indeed, the same cloud-computing technology that maintains your iTunes library is slowly but surely taking hold in medical records. Once issues related to security and privacy are resolved, moving medical records into the cloud will help doctors and hospitals share those records more easily, resulting in better-informed medical decisions. For instance, hospitals will be able to compare their treatment protocols with those of other hospitals and improve the efficiency and cost effectiveness of patient care.
Among providers of cloud-based software, Cerner (headquarters: Kansas City, market capitalization: about $12 billion) has no equal, in our judgment. Due to its superior design, the company's software has been widely adopted by health-care providers. We think the market for health-care cloud computing that Cerner competes in could reach $5.4 billion by 2017, up from $1.7 billion in 2011, according to market-research firm MarketsandMarkets.
Key producer-durables technologies:
vision systems, lasers, and robotics
To the uninitiated, the producer-durables sector, the home of heavy equipment, might seem a relatively low-tech sector. But it's the producer-durables companies adopting technology to automate manufacturing processes and control labor costs that are generally growing the fastest today.
Manufacturers in both developed and emerging nations are reaping the benefits of technologies from companies like Cognex (headquarters: Natick, Massachusetts; market capitalization: about $1.5 billion), a maker of vision systems used in quality control; IPG Photonics (headquarters: Oxford, Massachusetts; market capitalization: about $3 billion), which produces high-powered lasers used in cutting and etching materials such as metals; and Fanuc (headquarters: Yamanashi Prefecture, Japan; market capitalization: about $5 billion), a leader in industrial robotics for assembly-line production.
Key energy technologies:
4D imaging and fracking
In the energy sector, the days of the independent wildcat speculator drilling on a hunch for the next big "elephant" (industry jargon for a major oil or natural-gas discovery) are long gone. Now, energy companies or their combines prevail, and they're capitalizing on advances in technologies like seismic imaging to gain in-depth knowledge about the geology and commercial potential of drilling sites. Such knowledge in turn is improving the success rate of drilling projects once considered highly risky or economically prohibitive.
In deep-water drilling, firms are using seismic imaging to send sound waves underwater, and the timing and volume of their reverberations help create detailed maps of the subterranean surfaces being measured. As a result 4D imaging, a technology that the industry was slow to adopt, is gaining more acceptance and enhancing productivity. 4D imaging compiles the results of traditional 3D surveys over time; time is the fourth dimension of this technology, and its measured effect on subterranean landscapes improves the accuracy of seismic surveys.
For instance, in the Gullfaks oil field in the North Sea, 4D imaging is credited with contributing to a 60-million-barrel increase in production – the equivalent to more than one year's production there previously. Schlumberger (headquarters: Paris, market capitalization: about $100 billion) helped make that possible. The company is renowned for refining 4D imaging technology, among other energy-services technologies. Towards that end, Schlumberger in 2010 invested $919 million in research and development – more than all other energy-services companies combined.
Another highly promising technology, hydraulic fracturing, or "fracking," involves horizontal drilling, a technique that taps pockets of natural gas trapped in layers of shale rock. Fracking helped increase U.S. production of shale gas from 1 trillion cubic feet in 2006 to 5 trillion cubic feet in 2010, according to the U.S. Energy Information Administration. Production of shale gas is projected to reach 13.6 trillion cubic feet by 2035. Cabot Oil & Gas (headquarters: Houston, market capitalization: about $8 billion) is a key player in fracking. Its gas production soared 43.5% in 2011 from the previous year. Many of the company's fracking projects are located in the Marcellus Shale deposit, which stretches across vast expanses of Pennsylvania, Ohio, and West Virginia. Geologists estimate the Marcellus Shale may contain anywhere from 150 trillion to more than 500 trillion cubic feet of natural gas.
Key materials/processing technology:
Today even as pastoral a place as the farm has been transformed into a technology laboratory, thanks to innovations like precision agriculture. Precision agriculture is a growing movement that makes possible higher crop yields, lower costs, and more environmentally friendly farming practices. It involves the use of global-positioning satellites, database management, and digital imagery, among other technologies, and its scope extends from planting to harvesting.
For instance, the Connected Farm System of Trimble Navigation (headquarters: Sunnyvale, California; market capitalization: about $5 billion) employs global-positioning satellites to help farmers improve their irrigation methods, directing the flow of water to crops with greater efficiency and precision. Trimble's satellite-imaging technology is so powerful that it can home in on a speck of farmland as tiny as an inch and a half.
Key technology-sector technologies:
semiconductors, mobile devices, and cloud computing
In the technology sector, the semiconductor and mobile-device industries are under the most pressure to innovate, in our estimation. Neither industry is for business people who are faint of heart.
For one, the semiconductor industry is highly cyclical, because demand for chips rises and falls with the sales curve of laptops, smartphones, tablets, and industrial products. As a result chip makers must find a balance between meeting current levels of demand and ending up with a warehouse full of unbought inventory. Plus, chip makers are compelled to continually improve the speed and memory capacity of their products in an effort to keep pace with Moore's Law and out-do the competition. We liken chip makers to world-class cyclists who use aerodynamic helmets, carbon-fiber bike frames, and Spartan diets to gain every possible edge in performance.
Among the select few semiconductor firms that have been able to juggle all that successfully are Qualcomm (headquarters: San Diego, market capitalization: about $106 billion) and Broadcom (headquarters: Irvine, California; market capitalization: about $19 billion). They have generated double-digit earnings growth in the past five years by designing and developing powerful semiconductors for wired and wireless communications.
Both Qualcomm (QCOM) and Broadcom (BRCM) are suppliers to Apple (headquarters: Cupertino, California; market capitalization: about $586 billion) and Samsung Electronics (headquarters: Seoul, market capitalization: about $173 billion) for smartphones and tablets. Apple and Samsung in turn hold leading positions in their segments of the mobile-device market.
For example, Samsung commands a 22% share of the global smartphone market, up from 16% in 2011. The company's Galaxy smartphones are the world's best sellers – the company shipped 50.2 million smartphones last quarter, compared with Apple's 26 million iPhones, according to research firm IDC. (However, Samsung's lead in smartphones could erode in the future, given the recent federal-court patent decision against Samsung and in favor of Apple.)
Apple rules the tablet market, with a 70% share for its iPad. Apple of course holds big shares of the markets for smartphones (the iPhone), personal computers (Macintosh), and portable music players (the iPod) as well. In fact, Apple benefits from an unparalleled "wow" factor for almost all of its products. We anticipate the iPhone 5, expected to be introduced later this year, will elicit a new round of wows from Apple fanatics (often called Apple Fanboys for their extreme loyalty to the company's brand) and technology pundits.
Finally, no overview of technology today would be complete without some mention of cloud computing. Cloud computing permits companies to house their software (and hardware, in the form of computer servers) "in the cloud," or online. In the cloud, employees can gain access to their documents on a mobile device, instead of being limited to a desktop computer and its costly software. And their employers can rent data storage and computer-server time from cloud-computing vendors like Amazon.com, at a fraction of the cost of owning and running their own computers. Such advantages have helped power the explosive growth of the cloud-computing market, which will expand from $41 billion in 2011 to $241 billion in 2020, according to Forrester Research.
In sum, we as growth investors believe that the companies most committed to developing technology and incorporating it into their businesses stand the best chance of flourishing. And we think those kinds of companies, not coincidentally, stand the best chance of being winners in the stock market, too. In the classic 1941 movie The Maltese Falcon, Humphrey Bogart famously characterized the jewel-encrusted statuette of a falcon that was relentlessly pursued by a bunch of international scoundrels as "the stuff that dreams are made of." We like to think of tech-savvy companies in exactly the same way – as the stuff that dreams are made of in stock investing.
The views, opinions, and content presented are for informational purposes only. They are not intended to reflect a current or past recommendation, investment, legal, tax, or accounting advice of any kind, or a solicitation of an offer to buy or sell any securities or investment services. Except as otherwise specified, any companies, sectors, securities, and/or markets discussed are solely for illustrative purposes regarding economic trends and conditions or investment process and may or may not be held by Turner, the Turner Funds, or other investment vehicles or accounts managed by Turner or its affiliates. Past performance is no guarantee of future results.
Turner Investments refers to Turner Investments, L. P., its subsidiaries, and affiliates. Nothing presented should be considered to be an offer to provide any Turner product or service in any jurisdiction that would be unlawful under the securities laws of that jurisdiction.
Turner Investments, founded in 1990 and based in Berwyn, Pennsylvania, is an investment firm with more than $11 billion in assets under management in stocks, as of June 30, 2012. Turner manages growth, global/international, and alternative separately-managed accounts and mutual funds for institutions and individuals.
For a quick rundown of Turner Investments' views on the stock market and growth-investment strategy, watch the Quarterly Perspectives With Bob Turner video at this link: http://www.turnerinvestments.com/quarterly-perspective/for/inst
As of July 31, 2012, Turner held in client accounts 599,273 shares of Apple, 245,498 shares of Amazon.com, 4.3 million shares of Broadcom, 1.9 million shares of Cabot Oil & Gas, 1 million shares of Cerner, 492,910 shares of Cognex, 1.5 million shares of eBay, 183,772 shares of Google, 155,615 shares of Intuitive Surgical, 500,970 shares of IPG Photonics, 1.9 million shares of Qualcomm, 14,494 shares of Samsung Electronics, 1 million shares of Schlumberger, 804,159 shares of Trimble Navigation, 42,820 shares of VeriFone Systems, and 481,000 shares of Visa. Turner held no shares of Discover Financial Services, Fanuc, MasterCard, or Netflix.
Stocks Discussed: GOOG, EBAY, QCOM, BRCM,