Seeking Alpha
, Think Finance (1,011 clicks)
Long/short equity, arbitrage, event-driven, research analyst
Profile| Send Message|
( followers)  

This is the sixth article in a series of articles covering and summarizing different investment themes/thesis. These themes are usually very powerful and answer for the moves of stocks, entire sectors or even the entire market. The relevance of themes for specific stocks, sectors and even the entire market is explained in the first article in the series (linked below).

The previous articles on this series (by the order they were published) can be found here:

Themes 16-18

This article will be the sixth in a series of articles summarizing themes which are moving specific sectors or markets today. Knowing these themes can help when selecting securities. I'll continue with the following three themes:

  • CPU integration;
  • Digital delivery;
  • Cloud computing.

CPU integration

Theme

CPU integration refers to the trend of incorporating more and more functionality into a computer's CPU as the process shrinks each transistor more and more. Over the years this has led to the CPU also assuming the duties of a math co-processor, of the memory interface, and more recently it's bound to eat up networking fabric and the GPU. In the future it might also end up incorporating RAM. This process can help with performance, cost and power consumption.

The process shares some similarities with what happened with the Windows OS and how it incorporated more and more functions that were previously separate, like disk compression, anti-virus, browser, etc.

Positive implications

The main beneficiaries are potentially those doing the integration, as they find a way to capture more of a system's value. At this point Intel (NASDAQ:INTC) and Advanced Micro Devices (NYSE:AMD) are two of the prime examples. Other companies, like Qualcomm (NASDAQ:QCOM) or nVidia (NASDAQ:NVDA) are going through the same process for mobile CPUs, incorporating GPUs as well as the wireless logic (LTE) into the dies. However, as I wrote recently, Intel's renewed foray into their markets will probably give them a lot of grief.

Negative implications

The negative implications fall mostly on those companies whose functionality is integrated into the CPU, potentially obsoleting them. This phenomenon was deadly when the same thing happened with Windows, and it's likely that it won't be much softer when it comes to the CPU.

Two companies at risk are nVidia , due to the GPU integration, and Mellanox (NASDAQ:MLNX), due to the future fabric controller integration. Akram's Razor has a good write-up on the Mellanox problem.

Digital delivery

Theme

Digital delivery refers to the trend where many services are now rendered electronically, in a dematerialized way. These include:

  • Books (as in ebooks);
  • Apps (games and software);
  • Video;
  • Music;
  • Insurance and banking;
  • Brokerage;
  • News;
  • Travel tickets and accommodation;
  • Gaming (betting);
  • Etc.

Obviously this type of delivery entails much lower costs and much faster and convenient delivery. It's both superior and cheaper, so it's impossible for it not to overwhelm traditional physical delivery.

Positive implications

The winners in this revolution tend to be the pure players on the new medium. Like Netflix (NASDAQ:NFLX) on video, even though it is losing its physical DVD business, or Apple (NASDAQ:AAPL) on music and apps, or Amazon.com (NASDAQ:AMZN) in ebooks, though here it will be losing its physical books business. Or Priceline (NASDAQ:PCLN) and Expedia (NASDAQ:EXPE) in travel and accommodation. Or Interactive brokers (NASDAQ:IBKR) and others in brokerage.

Negative implications

The losers are those that can't make the transition or which, upon making the transition find themselves as not being leaders or close. Companies like Blockbuster, Borders, Barnes and Noble (NYSE:BKS). Here Amazon.com also shows up as a potential loser, because it already had a prominent position in distributing physical media as in books, CDs with software, DVDs, etc, and most of that media is transitioning to OS-integrated stores doing digital delivery which Amazon.com cannot control or profit from.

Cloud computing

Theme

The trend towards cloud computing is the trend towards providing computing power as a service from a remote farm of servers. Originally, the cloud stood as a symbol to designate a wide area network (WAN). Cloud computing usually stands in contrast to running software in a in-house server farm, though in practice such can constitute a private cloud as well, as it too can be accessed from a remote location.

The main benefits of cloud computing come from its scalability and from theoretically lower maintenance and upgrading costs, as the software is in a centralized location instead of being distributed in client machines. Also, if one uses third party provisioning for a cloud, one transforms the investment and fixed cost into a variable cost linked to usage. In short, cloud computing promises lower costs, variable costs instead of fixed, quicker scalability.

Positive implications

The early winners of the cloud race can get some first mover advantage. Although cloud apps and architectures are supposed to facilitate moving between systems, reality is that each ecosystem has some technical stickiness thus there are barriers to entry in the business proportional to the barriers to exit any given ecosystem.

In this regard, Amazon.com's AWS stands as a leader and is likely to have some stickiness even if other competitors' systems prove themselves faster or cheaper, like Google's (NASDAQ:GOOG).

Negative implications

The companies selling in-premises software are bound to be affected by the cloud computing revolution if they don't adapt quick enough. This has already hit some CRM (Customer Relationship Management) providers as they faced the quick growth of Salesforce.com (NYSE:CRM), for instance.

However, it should also be said that there are no barriers to moving towards provisioning software as a service, so it's not impossible for companies to transition successfully. There are no barriers, other than the fact that software as a service is sold as a kind of rental, and the in-premises software companies might be used to seeing its software being paid in full upfront.

Source: 3 Investment Themes - CPU Integration, Digital Delivery And Cloud Computing