S&P Global Market Intelligence’s Agam Shah and Waqar Jamshed published an article discussing Apple’s semiconductor development strategy, which quotes Ensemble Capital’s Senior Investment Analyst Arif Karim.

As they note Apple has been targeted in the investments it has made in designing specific semiconductor components, bringing in house key pieces of technology development that have enabled it to differentiate the user experience of its hardware products such as the iPhone, iPad, and AirPods.

While the system processor and graphics processors have been long time in-house designed components, S&P Global discusses how important the modem chip is becoming, heretofore supplied by Qualcomm and Intel, especially ahead of the upcoming 5G launch and the applications it will allow.

This has become even more critical to Apple since the fight over license fees it pays to Qualcomm has cut off modem chip supply from the technology leader, while its current sole alternative, Intel, has continued to be late to market with competitive cutting-edge modem chips. The situation potentially handicaps the iPhone’s time to market on connective capabilities. Given the iPhone’s market position, customers generally expect it to have the advanced feature sets alternative smartphones using Qualcomm’s chips offer in their products when deciding to buy a new one.

For more information we recommend a read through of the linked S&P Global article, which provides great overview of Apple’s semiconductor development strategy.

 

 

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by clients invested in Ensemble Capital’s core equity strategy you will find a disclosure regarding the security held above. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument. Ensemble Capital employees and related persons may hold positions or other interests in the securities mentioned herein. Employees and related persons trade for their own accounts on the basis of their personal investment goals and financial circumstances.

Until the 19th century, humans got from Point A to Point B in limited ways. They could walk, ride a horse, or get on a boat. That’s about it.

So, imagine what it must have been like to see a self-propelled locomotive for the first time. Here’s the reaction of a parish clerk in Victorian England: “That was a sight to have seen; but one I never care to see again! How much longer shall knowledge be allowed to go on increasing?”

We can laugh at the clerk’s reaction with the benefit of hindsight, but his reaction is undeniably human. The idea that the world is rapidly changing in your lifetime or your children’s lifetime can be concerning. We see similar reactions today regarding emerging technologies like autonomous vehicles, robots, and artificial intelligence.

How do we prepare ourselves and our children for this great unknown? What will happen to my job? What kind of jobs will my kids have?

And these reactions are precisely what Amara’s Law would predict: “We tend to overestimate the effect of a technology in the short run and underestimate the effect in the long run.” Indeed, this is a similar concept to hyperbolic discounting and the Gartner Hype Cycle (chart below).

Someday becomes today

At Ensemble, we try to follow Amara’s Law and filter out the excitement from the “inflated expectations” phase of a new technology. At the same time, we don’t want to ignore or discount the technology’s potential longer-term implications.

Instead, we ask: “How might the technology impact the company’s moat over the next decade?” Ultimately, we want to own companies we believe can maintain or widen their economic moats over the next decade and produce high returns on invested capital (ROIC). As such, we want to understand the ways the technology can be a long-term opportunity or a threat.

Put another way, we’re more concerned with the “slope of enlightenment” and “plateau of productivity” phases in the above chart. And while they may be years or a decade away, those phases matter to us now, as they impact our terminal growth and ROIC assumptions that drive our valuation models.

Life comes at you fast

Just as important, once the technology gets through a certain level of adoption, the market, being forward-looking, quickly catches on. Consider that a 2006 documentary entitled “Who Killed the Electric Car?” discussed how previous versions of battery-powered electric vehicles failed to gain traction in the U.S. At the time, the dream of EVs in the U.S. seemed lost. This was a classic “trough of disillusionment.” Just five years later, the same filmmaker produced “Revenge of the Electric Car” on how EV enthusiasm was reborn.

We’re now on the “slope of enlightenment” phase of the EV hype cycle.

Indeed, a recent Morningstar report shows that EVs could become the standard for new car sales in the not too distant future.

This is exactly why we’d be negligent not to consider the potential long-term impacts of emerging technology here today.

Technology and our portfolio

Though autonomous vehicles (AVs) are likely in the trough of disillusionment phase of the hype cycle, we think they are inevitable. There’s still much debate about who will own the AVs – fleets, individuals, or both – but once they become more common on our roads, they will have a major impact on some of our portfolio companies, in potentially good and bad ways.

As passengers eventually spend more time hands-free on trips, they’ll seek more in-vehicle comfort and entertainment. This could be a positive for Starbucks and Netflix. We can imagine Starbucks sending coupons or drink deals directly to AVs that are approaching one of their restaurants. An impulse trip to Starbucks may eventually be akin to an impulse candy purchase at the grocery store checkout today.

Passengers may also want to spend the time with their favorite Netflix shows. Netflix CEO Reed Hastings has famously said that his biggest competitor is sleep, but commuting is probably his second-biggest competitor, as the average American spends about 50 minutes driving to-and-from work each day.

On the other hand, autonomous trucks could present a threat to freight logistics company, Landstar System. If freight carrier supply outstrips shipper demand, it would drive freight prices lower. This would, in turn, reduce the value of Landstar’s network of drivers and agents.

It’s a real risk, but the main reason Uber and AirBnb were so successful is that they unlocked massive dormant supply of drivers and properties. The same cannot be said for big rig drivers. We also believe trucks will continue to need human navigators, much the way planes, trains, and other heavy transportation systems use autopilot but still have a human in charge. There’s also more to truck driving than steering, such as loading and unloading, processing, and load management.

Bottom line

We might be wrong about these potential outcomes, but we’d be remiss not to think about them or give them serious consideration right now. It’s not so much that these emerging technologies will have immediate impacts to our holdings. But, when they do, the impacts will be far bigger than imagined.

As of the date of this blog post, clients invested in Ensemble Capital Management’s core equity strategy own shares of Starbucks (SBUX), Netflix (NFLX), and Landstar System (LSTR). These companies represent only a percentage of the full strategy. As a result of client-specific circumstances, individual clients may hold positions that are not part of Ensemble Capital’s core equity strategy. Ensemble is a fully discretionary advisor and may exit a portfolio position at any time without notice, in its own discretion.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by clients invested in Ensemble Capital’s core equity strategy you will find a disclosure regarding the security held above. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument. Ensemble Capital employees and related persons may hold positions or other interests in the securities mentioned herein. Employees and related persons trade for their own accounts on the basis of their personal investment goals and financial circumstances.

Each quarter, Ensemble Capital hosts a conference call with investors to discuss the current market, economic conditions, and a few of our portfolio holdings.

This quarter’s call will be held on Monday, April 8 at 1:00 pm (PST)

We’d love for you to join us on the call, which you can do by REGISTERING HERE or following the dial-in information below:

  • Dial: 1-800-895-1549
  • Conference ID: Ensemble

If you’d like to listen to our previously-held quarterly calls, an archive can be FOUND HERE.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by clients invested in Ensemble Capital’s core equity strategy you will find a disclosure regarding the security held above. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument. Ensemble Capital employees and related persons may hold positions or other interests in the securities mentioned herein. Employees and related persons trade for their own accounts on the basis of their personal investment goals and financial circumstances.

Weekend Reading

23 March 2019 | by Mike Navone

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

Beware of the Dividend Cult (Vitaliy Katsenelson, @vitaliyk, Advisor Perspectives)

Like many investors we love a good paying dividend stock. But what we really look for is companies with high and sustainable cash flow production, run by management teams that allocate that cash in the most productive way possible. In this piece Vitaliy Katsenelson pushes back on some investors’ myopic focus on dividends in an argument we strongly support.  Ensemble President and CIO, Sean Stannard-Stockton wrote about his thoughts on stock valuations in this article: The Risk of Low Growth Stocks.

New York Times CEO Warns Publishers Ahead of Apple News Launch (Reuters, The New York Times)

Apple is expected to launch an ambitious new entertainment and paid news digital service next Monday as they push back against streaming video leader Netflix.  This has Mark Thompson, CEO of the New York Times feeling uneasy as he has warned that relying on a third party for distribution can have dangerous consequences for publishers as they may lose control over their own content.

Airlines Review Plans as Boeing Phases First Cancellation of 737 MAX Order (Robert Wall, @R_Wall, The Wall Street Journal)

Boeing is one of two major commercial aircraft producers and with the recent problems of the 737 MAX, they’re having to adapt quickly as passengers are losing confidence in this aircraft.  Following the two accidents, regulators idled the global fleet of more than 370 MAX planes and Vietnam’s VetJet are considering halting all future purchases.  Although the aircraft represents only a fraction of Boeing’s global fleet, the company is having to adapt fast to avoid negative customer sentiment.

 

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by clients invested in Ensemble Capital’s core equity strategy you will find a disclosure regarding the security held above. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument. Ensemble Capital employees and related persons may hold positions or other interests in the securities mentioned herein. Employees and related persons trade for their own accounts on the basis of their personal investment goals and financial circumstances.

A summary of this week’s best articles. Follow us on Twitter (@INTRINSICINV) for similar ongoing posts and shares.

‘We Know Them. We Trust Them.’ Uber and Airbnb Alumni Fuel Tech’s Next Wave. (Erin Griffith, @eringriffith, The New York Times)

Riley Newman, a former head of data science at Airbnb, created a venture capital fund named Wave Capital to invest specifically in Airbnb employees who were planning to leave to start their own companies.  “It’s part of Silicon Valley’s often-incestuous circle of life. The start-up world projects a meritocratic image, but in reality, it is a small, tightknit club where success typically hinges on whom you know.”  Silicon Valley Mafias are nothing new: Fairchild Semiconductor, one of Silicon Valley’s earliest successes, was created by former Shockley Semiconductor employees, and the Paypal Mafia has included some of the most successful entrepreneurs of the last century including Peter Thiel, Elon Musk, and the creators of YouTube, Yelp and LinkedIn.  What makes this round of mafias different is that they are part of the “gig economy” and have dealt with real-world policy issues in cities, as opposed to primarily dealing with the digital world.

Inside the Dystopian Reality of China’s Livestreaming Craze (Matthew Walsh, @matthewwalsh91, Sixth Tone)

“People’s Republic of Desire” is a dystopian documentary that highlights the people behind China’s craze for online livestreaming, a market that could be worth close to $16.7 billion by 2020.  The film’s director, Hao Wu, has worked in Silicon Valley as well as for Alibaba and Yahoo China.  “The characters in “People’s Republic” so thoroughly blur the line between their offline and online selves that the viewer struggles to see where real life ends and performance begins.”  The film has received many awards including the Grand Jury Award for best documentary feature at the 2018 SXSW Film Festival.

Boeing 737 Max 8 crashes stand out at a time of unprecedented airline safety (Christopher Ingraham, @_cingraham, The Washington Post)

Despite the two recent fatal accidents involving Boeing’s 737 Max 8 jet, flight safety has increased dramatically over the last few decades.  “When you take off on a commercial flight anywhere in the world, there’s less than a 1 in 1 million chance that the flight will end in a fatal crash. Back in the early 1970s, the odds of that happening were about 1 in 160,000.”  The increase in safety is due to technological advancements (such as collision avoidance systems) as well as increased regulation.

What is Amazon? (Zack Kanter, @zackkanter, Zack’s Notes)

What started as an algorithm for finding the best physical products globally became a platform for creating any customer-centric experience that the company came across.  The future of Amazon could go either way: either it will find a way to keep incentive structures intact and dominate the global economy for many years to come, or it will become another company that was successful until it wasn’t.

While we do not accept public comments on this blog for compliance reasons, we encourage readers to contact us with their thoughts.

The information contained in this post represents Ensemble Capital Management’s general opinions and should not be construed as personalized or individualized investment, financial, tax, legal, or other advice. No advisor/client relationship is created by your access of this site. Past performance is no guarantee of future results. All investments in securities carry risks, including the risk of losing one’s entire investment. If a security discussed in this blog entry is owned by clients invested in Ensemble Capital’s core equity strategy you will find a disclosure regarding the security held above. If reviewing this blog entry after its original post date, please refer to our current 13F filing or contact us for a current or past copy of such filing. Each quarter we file a 13F report of holdings, which discloses all of our reportable client holdings. Ensemble Capital is a discretionary investment manager and does not make “recommendations” of securities. Nothing contained within this post (including any content we link to or other 3rd party content) constitutes a solicitation, recommendation, endorsement, or offer to buy or sell any securities or other financial instrument. Ensemble Capital employees and related persons may hold positions or other interests in the securities mentioned herein. Employees and related persons trade for their own accounts on the basis of their personal investment goals and financial circumstances.