With Tesla (NASDAQ:TSLA) shares tumbling Thursday on news of an SEC lawsuit brought on in large part by the bombastic tweets of the eccentric Elon Musk, there seems no better time to take a peek at the tea leaves for the tech sector as a whole and to try to tease out the stories investors should be watching in the space. Technology has a transformative and disruptive power, and for that reason, it is always evolving and morphing in new directions. To be sure, this makes for compelling and storied opportunities for tech sector investors. As iconic names like Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN) cross epic thresholds in both market cap and market share, and the sector as a whole breaks its traditional mold and branches beyond computers and chips to phones, wearables, content, robotics and more, we wanted to know what the headline stories are and where investors should be casting a watchful eye. To find out, we checked in with more than a handful of our Marketplace authors focused on the tech sector. The result is this lively, eye-opening, and idea-filled Roundtable interview.
Here's our panel:
Seeking Alpha: Apple and Amazon have both breached the trillion-dollar mark in market cap (though Amazon has since pulled back). Let's start there with a question on each. For Apple, the latest iPhone event appeared to underscore that Apple is an iPhone company (and consequently, phones are an Apple profit generator). Is there a category besides phone that matters to Apple shareholders, and if so, what is it? If not, where does that leave Apple?
App Economy Insights: The iPhone is not a product anymore: it’s a brand, a lifestyle choice. With mainly three key new SKUs announced every year, the risks associated with a single product are not as high as they used to be. The iPhone is now, first and foremost, a gateway to the iOS ecosystem, the real force of Apple to reckon with for the decade to come. Services is the elephant in the room with 18% of Apple’s top line in Q3 FY18, up 31% yoy: AppStore, iCloud, Apple Music and Apple Pay are driving this segment. I could see how a decade from now, Apple will be driving most of its revenue from Services.
I also like where Apple is taking the “Other Products” segment with wearables and accessories, the fastest-growing segment (37% yoy). AirPods are absolutely fantastic, but it’s the Apple Watch that might represent what the future may hold for Apple Hardware. Watches can now be connected at all times without the need of a smartphone. As Apple makes them lighter, waterproof, expands the screen size and maybe one day starts offering screens that curve around your wrist, it’s easy to imagine connected watches being the next big thing.
Elazar Advisors, LLC: No doubt iPhone is their big driver, but we have that services will make up 30% of operating profit by next year. Apple's a machine and has their customer base in a trance. This year could be better for Apple, as their big form factor change of last year gets a price cut this year. So, those fence-sitters could upgrade.
EnerTuition: It appears that Apple is set to do surprisingly well with watches - mainly for health and fitness reasons. This could become an increasingly larger percentage of Apple's business. Looking further ahead, Autonomous BEVs could be a large interesting opportunity for Apple. Clearly, Apple is burning a lot of money on R&D, but we may not see any meaningful revenues until 2020 or 2021.
Erich Reimer: Though Apple offers a variety of hardware devices, ranging from smartphones to iPads to Macs to even the Apple Watch, in recent quarters we have seen the smartphone core continue to expand and grow as its iPads and Macs segments have comparatively fell behind. Apple has clearly found that they have even more potential in the smartphone market they already dominate, as now they have tried this past year smartphones with different functionality, prices, and designs, all with seeming success. I think this trend will likely continue now that Apple has seen its initial tests of new smartphone markets rewarded well.
Yet, even with Apple’s smartphone and hardware core, the company is also increasingly seeing immense potential with its various services and software products, ranging from the App store to iTunes to more. These segments actually have higher growth rates than Apple’s smartphone core oftentimes, and are contributing immensely to Apple’s overall earnings growth and expected to continue to do so. Whether Apple can keep this up will be just as important for the company’s valuation trajectory as its smartphone segment.
Jeffrey Himelson: Apple's path to a trillion-dollar company was paved with its iPhone sales. However, with Apple already owning 88% of the market for phones priced over $800, Apple must seek growth from other avenues. One area will be with smartwatches, as evidenced by Apple's emphasis on discussing its Series 4 watch at length during their recent product launch. Additionally, it will be important for Apple to attempt to diversify its revenue streams via services and content. Apple has been trying to generate its own original content, and their future growth potential lies in having success in these ancillary domains.
Joe Albano: There certainly is. Just look at the Services line of revenue. It grew at 31% year over year this past quarter, 31% year over year the quarter before that, and is the second-highest revenue line behind the - you guessed it - iPhone line. What Apple has is a bread and butter phone line holding down the fort. It's built its foundation on this iconic brand, which allows the company to work on other lines of revenue - higher-margin ones, I might add, such as the digital content under Services.
Jonathan Cooper: Yes, other categories should matter to Apple shareholders. Last quarter, despite the iPhone's immense size, it contributed only ~56% of Apple's revenue, and other categories (services and other products) are growing more quickly than iPhones. While the iPhone is a cash cow, it is not Apple's only product.
Investors should not underestimate the symbiotic relationship between Apple's products - and it isn't just the iPhone propping up other Apple products. An individual who has an active iTunes account, a MacBook Air, or an Apple Watch is more likely to purchase a new iPhone and stay in the Apple ecosystem - than a user who has no other Apple products. On a personal level, I am excited about the Apple Watch and its ECG and other health-monitoring functions. Those functions will open up the Watch to a market of older consumers who may not otherwise consider purchasing a smartwatch.
Mark Hibben: Wearables and services are of the most interest (besides iPhone) to Apple investors, since these are showing the most growth. In the June quarter conference call, Apple reported a 60% year=over-year growth in wearables revenue. Wearables includes Apple Watch and AirPods wireless headphones. Services grew by 31% y/y.
SA: Meanwhile, Amazon seems to be entering every category, including retail stores. What do you view as key risks for Amazon as it pushes into new (and old-school) verticals or distribution means?
AEI: Online-to-Offline (O2O) has been a strategic initiative for Tencent (OTCPK:TCEHY) and Alibaba in China. The Amazon brand has become so ubiquitous that a strong physical presence in urban and populated areas seems like a natural fit.
I try to think holistically about Amazon’s strategy at a company level. Many investors think too incrementally about their strategic initiatives. What really matters is where it fits in the grand scheme of things. This move will represent a very small portion of Amazon’s business. Retail stores won't be as profitable as AWS, but it offers optionality to the company. I think more about the opportunities than the risks: could Amazon eventually compete with Walgreens (NASDAQ:WBA), CVS or Starbucks (NASDAQ:SBUX)? Only time will tell.
EA: Amazon is probably one of the best earnings stories out there. We just upped our numbers again and have huge EPS and stock price upside. They are hitting an operational inflection point at AWS and their North America divisions because they need less investment to generate the same dollar of revenue. This new ad business is big, high-margin and growing like 100%. It's making the whole income statement look amazing. AWS is also hitting stride with revenues accelerating the last couple of quarters. Amazing story!
ER: I think Amazon’s biggest investment risk will be when investors begin demanding, vis-à-vis that famous 1980s burger commercial, “Where’s the beef?” The company has begun showing increasing earnings as it demonstrates some justification for now its roughly trillion-dollar valuation, but it is becoming more difficult to justify an early-stage valuation multiple at its current level, let alone if it continues its current rate of market capitalization growth.
In terms of its continuing actual forays into business segments outside of its online retail core, we see that Amazon has had a real hit-or-miss record as it experiments with different products and sectors. For example, Amazon’s long-anticipated healthcare venture seemingly has faltered due to it not understanding the particular set of regulatory procedures and dynamics governing that line of business. Amazon is a company where many of its parts benefit from the incredible and massive Amazon enterprise they are a part of and can draw from, but as we’ve seen, there are limits to this advantage as well.
ET: Amazon is likely to rule retail for a long time to come. The biggest concern for investors may not be how the company will do operationally, but what makes for a acceptable valuation for the company. There is no solid explanation as to what Amazon should be worth. At the same time, Amazon has the momentum to grow in it its market cap one day. For this reasons, by no means is Amazon a good short.
JA: The risk is in the adventure it's going for: everything. There's a risk in life and in business where you spread yourself too thin. Amazon is testing the bounds of how far it can spread. But it's important to keep in mind Amazon has stopped some ventures when it has realized what the costs are versus the returns, such as the pharmaceuticals to hospitals. This awareness is the key to Amazon's success; understanding when a venture is not going to be accretive.
JH: I believe the most significant risk for Amazon is the Department of Justice (DOJ) and the Federal Trade Commission (FTC). If the either of these regulators label Amazon as anti-competitive, they may require it to break up, which could significantly impair Amazon's value. Additionally, the DOJ or the FTC may not approve of new acquisitions, which could stunt Amazon's ability to grow further. The recent FTC decision to limit Walgreens Boots Alliance's (Walgreens) acquisition of Rite Aid (NYSE:RAD) stores shows how significant this risk is. The FTC even rejected a proposed transaction in which Walgreens offered to purchase fewer than half of Rite Aid's stores.
MH: The key risk, of course, is that Amazon's expertise in e-commerce will not translate effectively into bricks-and-mortar stores. However, the cashierless store concept is very innovative and difficult for competitors to match given that it relies heavily on AI. Amazon should be able to expand via this route with relatively low risk.
SA: With Google (GOOG, GOOGL), Facebook (NASDAQ:FB), and Twitter (NYSE:TWTR), it appears regulation is the key risk - Europe continues to look askance at the companies in various areas, and the companies may become political targets in the U.S. If you're looking at these companies, how do you adjust for these risks?
AEI: Regulations could create a setback for any Internet Content company relying heavily on ad revenue, as illustrated over the last few months with GDPR. While this could create a short-term slowdown, both Google and Facebook have become bigger than the sum of their parts. They are some of the most amazing companies of the beginning of the 21st century and have the culture and leadership to drive their stories further.
I am not trimming my existing long positions in both companies anytime soon. They both should be the cornerstones of any long-term portfolio for the decades to come.
EA: This is very much getting harder. We downgraded the stock like 5 minutes before they announced their big guide-down on chat, so some of our subscribers were able to get out in the after-market before the big plunge. We rode it for a big run ahead of that. No doubt, privacy rules are killing them and can be an albatross for all these players.
ER: In terms of regulatory and political risk, there’s an immense amount of noise out there with, in my opinion, only very little actually worth seriously monitoring as an investment risk. Though you may see some out there suggesting dramatic options such as breaking up said companies, in reality, the results of the policymaking and regulatory process are likely to be far more mellow, such as in the form of data privacy and use protections or increased operational transparency.
Nonetheless, government action should be watched closely in terms of what actual regulatory orders and bills come out. While most potential policies would not have too much of an effect on the bottom line for many Internet services companies, the most draconian options still could be remotely possible, as the moods of public opinion can shift quickly and as certain countries may diverge in how they choose to deal with these companies.
ET: The fundamental business models of these companies have large network effects. Google and Facebook have also been acquiring other properties as their strategic imperative demands. If there is a growth blip due to Europe or any other reason, these companies are likely to recover in due course of time. Equity in these companies is likely to be resilient. Options and LEAPs owners may be exposed.
JA: What else is new with the EU? Apple and Google have already faced enormous pressures and fines/taxes from the EU. It was only a matter of an excuse to go after the other tech giants and social media networks. We've come to a point in history where companies who make money are the only ones with responsibility. There's a user and consumer responsibility, too, and the further we head in this direction, the more we have to worry about tech and large corporations as a whole being under attack from governments. No one is forced to used social media (going back to my user responsibility), so there's no solid foundation to break up a company that, one, doesn't own all of the industry (monopoly) and, two, are free apps - as in consumers aren't forced to buy anything!
JH: These regulatory risks are extremely important to consider. Privacy concerns are increasingly moving to the forefront of everyone's minds, and with that, technology companies are uniquely vulnerable. These companies, particularly Google, Facebook, and Twitter, derive most of their revenue by monetizing consumers' data. If regulators limited the ability of these companies to sell this data to advertisers, each of these would be hurt significantly. For this reason, I am not invested in either of these companies, since I find it a significant risk that is tough to predict, which injects lots of risk into these companies. Anti-trust regulatory risk is also one worth considering when valuing these companies, since many of them are priced for much more growth in the future.
MH: I've avoided social media companies and companies whose revenue depends mainly on advertising. I believe that these companies are overvalued and will run afoul of regulatory scrutiny and difficulties of self-policing.
EA: There's risk ahead in semis. We had been telling subscribers for a month or two there was risk in semis. We're momentum-oriented investors, as are, I think, most hedge funds and investment money in general. "Mo" investors hate slowing trends. Slowing pricing in memory is fine but investors hate it, so you have to respect that. Micron told us all on earnings that it's going to be a few quarters before they see some light. That's not good. Our EPS dropped, after having big upside previously.
ER: Chips are facing a difficult dichotomy in that there is immense market want for chips with better memory and processing capabilities, but consumers and businesses do not want to pay more than they are already paying - in fact, there seems to be an expectation of prices going down even as innovation goes up. I think for chips this paradigm will be difficult to break, as the technological and cost advancements in the sector mean that the chips are becoming cheap enough that someone will still be making them at the lower prices the market is calling for.
ET: There is very little doubt that we have entered a time of temporary overcapacity for several of the players. Memory and commodity players are the most sensitive to such cycles. Non-commodity players should continue to do relatively well unless there are fundamental competitive issues - like Intel (NASDAQ:INTC) and AMD Inc. (NASDAQ:AMD).
JA: If you look closely at Micron's report, there's nothing indicating the top of a cycle. The most substantial impact to guidance for Micron's Q1FY19 was the tax rate - some estimate as much as 31 cents to EPS. The remaining impact is from the recent Chinese tariff and Intel's CPU shortage, where the Intel shortage already appears to be on the mend. Crunching those numbers and putting them back into the guidance, you get a very, very similar quarter to the one just reported. Additionally, Micron showed a tremendous amount of strength on the NAND side of things, as even with declining ASPs, the company increased margins and revenue because of cost declines and volume of bits shipped - which also shows the demand elasticity in the NAND market at work.
MH: I've also avoided commodity semiconductor companies such as Micron, and I believe that recent events have proved the wisdom of this course. Instead, I invest in “new paradigm” semiconductor companies that provide integrated products base on their internal chip designs. The most important in the Rethink Technology portfolio are Apple and Nvidia (NASDAQ:NVDA).
SA: Tesla - what do you make of the past couple months, and where do we go from here? Note: this question was asked/answered before the news of the SEC charges broke.
EA: Tesla is the biggest earnings inflection story I remember in my career. This thing is nuts. Too many people caught up in all the media stories. If they are profitable for Q3, as they expect, you have to do the math to see what that means. The one hidden gem of data that nobody noticed in last quarter was the S&X gross margins at something like 37-38%. You had to back into that. I checked it with the company. That's absolutely nuts compared to other car companies. They are doing it. That should give you some sense where Model 3 margins can go. By the numbers and hitting this earnings inflection point, people are missing it. Earnings are what drive stock prices, and this earnings story is about to catapult.
ER: Tesla has, throughout its history as a public company, always been controversial, with people “reading the tea leaves” to divine what a quarter’s results may mean for the company someday turning profits and becoming the enterprise of the future. Yet, it’s undoubtedly been a particularly difficult few months for Tesla amid everything from the SEC investigation over the privatization tweet to company executives fleeing, from its historic losses to Musk’s own controversies.
I think with Tesla, the company will soon have to begin showing real, serious breakthroughs that not only stop its financial bleeding but actually begin showing how the company makes money like every other automaker out there. It’s been 15 years - one can only hold a $50 billion+ market capitalization out on hopes in an industry where so many meet production targets and find profits easily for so long.
ET: Tesla is an a lot more trouble than many realize. The company is dependent on capital markets, and capital is going to be difficult given the long-term lack of profitability, perennially underperforming CEO, and SEC/DOJ investigations. There is a significant chance of bankruptcy in Q4.
JA: I've stayed away from Tesla. There's just too much going on outside of the business itself, namely, Elon Musk. He is a wildcard in terms of letting his company do its thing and prove to everyone what he emotionally says - just let the actions and fundamentals speak for themselves. Prove bears wrong by performing and achieving and superseding goals. His personality gets in the way of his vision - he appears to be his own worst enemy. Great for volatility plays though through options, but not a stock I'm putting in my IRA.
JC: Tesla's last few months have been noisy, to say the least. Operationally, both Model 3 and Model S/X production appear to be on track to hit their quarterly targets, although the Model 3 may miss its burst-rate weekly target. However, the narrative continues to be dominated by negative coverage based on Elon Musk's antics (from berating divers to marijuana use to $420), quality-control issues on Tesla' vehicles, increasing competition in the EV space, Tesla's ability (or inability) to develop and build new models, the stop-start nature of Tesla's production lines, and concerns about Tesla's debt and cash flow.
Overall, I believe that investors should focus on Tesla's production, deliveries, and GAAP profitability over the next two quarters. Tesla has guided towards profits and positive cash flow in the next two quarters, and markets will react strongly to whether or not they are able to deliver on those promises. If Tesla produces the Model 3 profitably in relatively large quantities, I expect that markets (debt or equity) would be willing to give Tesla more capital for additional vehicle lines and production facilities. If not, Tesla's growth narrative will hit turbulence and shareholders will suffer.
JH: Tesla is another technology company that I'm avoiding at this point. Although Elon Musk is clearly a brilliant man and is a visionary, I don't like investing in companies that can't execute on their stated goals and that experience such turbulence. Tesla created an amazing product in their electric cars, but there is a deluge of competition entering the industry, so their pricing power may be limited as the market becomes a bit more commoditized. Additionally, there is significant exposure from Elon Musk's recent tweets regarding taking the company private. There have been a number of class actions filed by well-respected law firms, and there are potentially billions of dollars of liability stemming from this. Coupled with Tesla's leveraged balance sheet, this could spell trouble ahead.
MH: I believe that Tesla is on the cusp of sustained profitability, but this has been obscured by the antics of Elon Musk. Tesla badly needs a COO to take over day-to-day operations. Tesla also needs for Musk to assume a much lower profile in the media. Musk's infamous “taking Tesla private” tweet is certainly going to cost Musk some money, but I don't view it as a long-term problem for Tesla.
SA: AMD's rise this year has been more than impressive. Does it reflect a true changing of the dynamic between AMD and INTC (or AMD and NVDA), or an overreaction? Where do you see the CPU and GPU markets going from here?
EA: AMD's move up is deserved. It's way too rich for us now because we look out 12 months for earnings, and at the current price, you need to pay like 60X next year's earnings. We're also worried about some GPU channel build, which matters nearer term.
ER: In some ways, I think it does, as it reflects the beauty of the tech sector - which is even at its current design, a smaller but innovative company can take advantage of market opportunities and break the hold an older, larger, mega-corporation has built. Unlike many other sectors where innovation chugs forward but is slower, tech lives and breathes it constantly, and I think AMD’s boom this year at some expense of Intel is evidence of that.
Nvidia is still well-placed, I believe, as the company has a niche advantage from knowing its consumer base well and having the software know-how to continue to ensure its hardware products are performing effectively with its buyers. Overall, I think CPUs and GPUs are facing both increased demand for higher capabilities but also some pressure over prices for those higher-end processors, similar to chips, creating a mixed resulting trend. However, I think the sheer need for new CPUs and GPUs to host increasingly use-intensive software will still push the overall sector higher.
ET: AMD stock performance is understandable and justifiable given the competitive dynamics with Intel. In fact, this was forecasted in a January article from BeyondTheHype that the stock should double or triple this year. It is roughly where it should be. As far as Intel goes, the market is underestimating the competitive risk from AMD. The stock is overvalued. NVidia has a strong GPU story, but the stock has peaked. As discussed in this article, the company had to resort to unsustainable business practices to make Q2. There is trouble ahead for the stock.
JA: There's suddenly a lot priced into AMD's future. A little-known fact is the 7nm architecture of TSMC (NYSE:TSM), from which AMD derives its "superior" node over Intel is, in fact, closer to what Intel has out now in 14nm. The high-performance 7nm from TSMC is on the same schedule and is on the same playing field as Intel's delayed 10nm architecture - both of which aren't available.
"Intel’s 14nm++ process has undergone a lot of refinement and is currently the fastest high-performance architecture on the planet (TSMC has rolled out their 7nm process which is equivalent to Intel’s missing 10nm but it is not yet advanced enough to deliver on high performance dies that are clocked at a high rate) but time is quickly running out as TSMC races to get its high performance dies out the door in HVM mode. Both companies have given tentative timelines of 2019 for the high-performance versions of 7nm/10nm."
And we now know of the shortage in 14nm chips from Intel. So you tell me what is actually the best CPU and what the reason for a supply shortage is. Now, this is not to say AMD can't pick up some market share, which would increase its profitability. But it's not at the scale investors may be hoping for when it comes. AMD doesn't need a ton of wins on the market share side to do well for itself, but to say it's happening at the cost of Intel is a little far-fetched at this point in the game.
JC: AMD's rise reflects a major shift in the CPU market, while the GPU market is largely unchanged. Nvidia is still the major player in GPUs, with market share unchanged in the past year. However, AMD has been able to gain a foothold in very valuable CPU markets, including the introduction of competitive desktop CPUs at nearly every consumer price point - from $100 R3s up to $900 Threadrippers. AMD's market share gains with EPYC have been even more impressive, and the company looks likely to increase those gains over the next year with the introduction of 7nm EPYC Zen 2 processors in 2019. Data centers move slowly, but AMD is increasing their unit share steadily as Intel suffers. These high-end markets offer much higher margins than AMD typically receives, and should help AMD increase its profits and reduce its debt over the coming year.
MH: I'm still very skeptical about AMD and Intel. I view them as “old paradigm” commodity semiconductor companies that are merely fighting over an ever-shrinking market for old-style PCs and servers. I consider X86 obsolete, and therefore don't really consider either company a good long-term investment
SA: Tech used to be a sort of confined sector - computers, chips, etc. It has grown into more and more sectors - phones, communications, advertising, entertainment, etc. Are there any sectors or industries you think "tech" will transform in the next 5-10 years that investors should pay attention to, and what are you watching for?
AEI: I have been a financial executive in the video game industry for almost 10 years. That enabled me to be in the front row watching technology disrupt games in every possible way.
Now, my investment strategy is to specifically look at the next sectors and categories that are poised to be disrupted in the coming 10 years. Beyond internet content and social networks, I pay attention to Health Care (telehealth, gene therapy, medical devices), Financials (digital payments, Banking As A Service models), Transportation (ride share, food delivery), and Real Estate (search, marketplace, lending).
EA: The right answer is AI will transform a ton of sectors. AI is sick. So far, there's not a ton of investable opportunities, but we're digging.
ER: I think it’s less about the creation of new sectors, but rather, the maturation of the current path we are on. The true impact of advanced, high-capacity hardware in combination with elegantly designed software is beginning to show its impact, and business opportunities in sectors such as virtual reality, cloud computing, artificial intelligence (AI)-based analytics and tools, self-driving cars, and more.
We are still in the very early stages of rollout for many of these frontier and experimental technologies, which are the next stage from what we currently have in broad enterprise and personal use, but once they become increasingly mainstream, I think we will see nearly industry significantly disrupted by them in their internal operations, their external sales and partnerships, and entire strategic planning and thinking. It likely will be just as disruptive as when we saw the initial rise of the Internet, as now these technologies are essentially becoming “supercharged” with extraordinary, and in many ways unpredictable, impact.
ET: Artificial Intelligence and Machine Learning are the next major launch pads for tech. There will be many new industries that will be formed from this. Autonomous vehicles is certainly one area to watch. Medicine, worldwide, is also like to be transformed. In a few decades, practice of healthcare will look very different from today.
JA: Security is one. While there are some larger players out there now, there's certainly room for more to keep all of the technology we have come to know and love secure. My pick in this space is CyberArk (NASDAQ:CYBR). It has performed beautifully since I called to buy it after some disappointing guidance last summer. It has executed near flawlessly since then, and the near double in the stock price is proof.
At this point in history, nothing is off limits as far as what tech is trying to touch. The key to look for is a company or business which creates a solution to a problem you didn't know you had. Anyone who can convince you to buy something you didn't know you needed is a company worth looking into - as long as it's beyond a fad status.
JH: I think tech will transform the car sector in the next few years. Specifically, I believe self-driving cars will be ubiquitous in a few years. Car manufacturers that do not position themselves well for this change will be disrupted, and those that do will see a lot of growth. Additionally, a derivative industry that I believe will be transformed is the restaurant sector. With self-driving cars being able to deliver food quite cheaply, I think restaurants that count on getting consumers into their locations and rely on upsells, like beverage sales, will be hurt. One company that quickly comes to mind is Buffalo Wild Wings (BWLD).
MH: Collaborative robotics is an area of considerable interest for the Rethink Technology Portfolio. Collaborative robots are intelligent and able to be used in the presence of humans, unlike traditional industrial robots. Self-driving cars are in effect collaborative robots, but there will be many other applications for them, including retail, logistics, health care, and home automation. According to a recent series of reports by Gene Munster's Loup Ventures, collaborative robots are expected to grow at a CAGR of greater than 60% through 2025.
SA: What's another important story you are watching that these questions didn't cover?
AEI: On a macro level, there is a new sector in the S&P 500 called Communication Services that now includes companies like Alphabet, Facebook, Twitter, Netflix (NASDAQ:NFLX), Disney (NYSE:DIS), and even video game publishers like Activision (NASDAQ:ATVI) and Take-Two Interactive (NASDAQ:TTWO).
It’s an important recognition of the fact that you can’t categorize a company as “tech” simply because its business is built on the internet. It’s good news for those who felt overweight in technology and now can look at their portfolio with a better representation of their allocation between sectors. Passive investing is growing fast, and the rebalancing of FAANG stocks across three main sectors (Technology, Communication, Discretionary) might have a fundamental impact on where we’ll see a new bubble forming.
EA: I'm not there yet, but I also think crypto can change the face of transactions, and there will be a huge play here at some point with global consequences. But for now I think they just trade on sentiment, which is too hot-potato for us.
ER: Though much of the momentary market-relevant development in technology is in hardware, as the hardware advances, then so will the software, as now it has the requisite platforms to utilize and be hosted on, which then translates to advancements in Internet services from that software. I think we are close to an immense software breakthrough in a variety of B2B and retail segments and sectors that will see not only a variety of new product and revenue lines for companies with software components, but a variety of industries as they adapt to the new opportunities and dynamics created by increasingly complex and high-end software development.
ET: Solar has very quietly become a $100 billion business in a short period of time. It is a volatile space, but plenty of growth lies ahead.
JA: Nvidia certainly has a place in the news with its RTX Turing GPUs and cards. If what I'm seeing is correct, this could put a lot of things we see visually - not just in video games - but in animation and entertainment on a new level (as in efficiency and production time). It's going to take a bit of adapting - as any new technology does - but Nvidia has done a great job launching with partners who are on the last bit of development (both in terms of drivers and games). In contrast, some technology is invented and released without much thought of adoption, and even innovative technology falls flat because no one picks it up. I see Nvidia as mitigating this with its execution of Turing's launch.
JC: I am currently spending a lot of time analyzing the Canadian cannabis market. With recreational cannabis becoming legalized on October 17, the market is exciting but frothy. Despite the froth, I believe that there are excellent long-term opportunities and values in the sector. I expect to see amazing long-term growth - this market could explode from next to nothing today to over $200 billion in the next 15 years. As that happens, we will see enormous companies emerge from nothing; it is an exciting time to be investing in that market.
JH: Another important story that I'm watching is the battle for content that is heating up. Amazon, Apple, Netflix, Hulu, and others are increasing their budgets for content and trying to snap up as much as possible right now. If I were a TV show or movie writer, I would be so happy about this battle, as they will experience significant pricing power for their content. I'm on the lookout for companies that can create compelling content that they can package up and sell to these companies. However, the industry is quite fragmented, and there are not too many of these companies that provide a compelling investing opportunity. So far, I've found one that is creating such content, called Genius Brands (NASDAQ:GNUS), which produces kids TV shows such as Warren Buffett's Secret Millionares Club, but I'm always on the lookout for new ones, since this industry can be very lucrative.
MH: The release of Nvidia's RTX series graphics cards - I view these as revolutionary in that they will provide unmatched, cinematic realism in future games. The tech media have tended to downplay the impact of RTX, but I believe this is very short-sighted.
SA: What's one of your favorite tech investments right now, and what's the story?
AEI: Eventbrite (NYSE:EB) just raised $230 million in its IPO. I really like the culture of the company, with Julia Hartz being one of the few female Founder-CEOs in the Silicon Valley taking her company public. The story of the company is very inspiring, and their market doesn’t really have a ceiling. The company can work with a wide array of events: live show, marathon, painting class, eSports competition, or fundraiser. The possibilities are endless. I am looking forward to watching the story unfold, and I am already a shareholder.
EA: I have to say Tesla. Musk got cocky on analysts two quarters ago because he didn't need their capital. This stock should have been a private company. It's too hard for public investors to stomach. But I think it's now about to flip into profit, and big time. The Street's at like $3.00 for 2019. We're above $20.00. The world is way too bearish on this.
ER: I really like Microsoft (NASDAQ:MSFT). They are an extremely diversified technology company that combines a mix of the tried-and-true, such as its Microsoft Office products, as well as experimenting in cloud computing and other frontier sectors. Its mix of social media, through LinkedIn, and gaming, among other lines, makes for a company that is still innovative, benefiting as a whole from all these multifaceted parts as many of its once-peers in terms of market capitalization have faded. I doubt they will be experiencing an extraordinary boom, but that is not what they seemingly have been about in recent years. Rather, it seems like what we can expect from them is steady, stable, measured, and solid growth.
ET: Two names - SolarEdge (NASDAQ:SEDG) is one of the strong tech investments that has gone out of favor. But the story has a lot more legs than people realize. TSMC did very well during this semiconductor cycle but has been a bit soft lately for many reasons, including semiconductor cycle concerns. The story here is also stronger than what investors give credit for.
JA: Micron is still a favorite, even if it is beaten down here. There's nothing wrong with taking out some puts to hedge against the long position me and my subscribers have worked towards. It's still a volatile play, and there's money to be made on it. I also like Nvidia as Turing ramps up and heads into the holiday season. There's upside in Nvidia, as gaming revenue will take a turn upward when RTX gains traction.
JC: My favorite tech investment over the past year has been Roku (NASDAQ:ROKU). Roku is a pure play on over-the-top streaming, and is benefiting as that market moves from low-cost, low-margin, set-top players into software integrated into smart televisions. Over the past year, Roku has been able to grow their active user base by 46% and their revenue per user by 48%, resulting in y/y platform revenue growth of 96%. And as users counts have grown, users have become more engaged in the platform - streaming hours/user is up 8% over the past year. This is an increasingly engaged, growing audience that is generating more revenue per user each year. And I expect those trends to accelerate as television views continue to "cut the cord" and as new streaming services launch, like those from ESPN and Disney. Roku stands to benefit from this growing market.
JH: As my readers know quite well, my favorite investment right now is Fitbit (NYSE:FIT). Fitbit has a great balance sheet, with $580.5 million in cash, $242 million in accounts receivable that can be easily factored into cash, and $140 million in inventory and zero debt. On top of this, FIT's management has guided for a return to profitability in the coming quarters, and it has successfully pivoted its business and taken a significant share of the smartwatch market. On top of its success in hardware, FIT has been launching a number of initiatives to generate higher-margin SAAS revenue, such as with Fitbit Care, in which it partners with insurers and employers. FIT can then generate monthly recurring revenue by providing consumers with health and fitness coaching services. Additionally, by getting smartwatches on more consumers' wrists, it can generate revenue with other initiatives, such as by providing a Life Alert monitoring competitor. This industry is poised to be disrupted, as Life Alert charges roughly $90 per month for this service.
MH: For sheer growth, Nvidia is the favorite, and is weighted the most in the RT Portfolio.
Well, that's the state of tech, according to some of our Marketplace authors. What about you? What tech sector stories are you watching that perhaps we didn't cover here? What are some of your favorite tech investment ideas? Tesla - love it, hate it, couldn't care less? Share your thoughts in the comments below.
Huge thanks again to our panelists. As a reminder, you can check out their work here:
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: App Economy Insights is long EB, AMD, FB, AAPL, AMZN, NFLX, GOOG.
EnerTuition is long SEDG, TSM, AMD, GOOG, GOOGL; short TSLA.
Erich Reimer is long FDN.
Jeffrey Himelson is long FIT and GNUS.
Joe Albano is long MU, FB, and INTC.
Jonathan Cooper is long ROKU, TSLA and AAPL.
Mark Hibben is long AAPL and NVDA.
Robyn Conti is long FIT.