Predictive TMT Analysis from CM Research

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SYNC.

Global investment themes: telecoms, media and technology

Issue No. 65

Predictive Analysis from CM Research 24 July 2013

Recent themes 2014 TMT Trend Forecast Indian Accounting Bomb Cyber-Security Robotics 3D Printing Indian IT Services Apple’s valuation Top 10 Tech Predictions Internet regulation Forensic Accounting Tips UK tech stocks to watch Chinese social media Big Data Smartphones Facebook overvalued The Cloud Mobile payments Future of Wireless (Vol. II)

Coming soon Internet of Things Software defined networks Internet TV

Our predictive analysis has worked well in the past...

Over the last two years, many of our thematic investment ideas in technology, media and telecoms have gone from theory to reality. This report summarises the ten major predictions we got right and one big one we got wrong.

The stock ideas we got right spanned investment themes as diverse as the mobile internet, connected devices, cyber-security, 3D printing, mobile payments, robotics, internet advertising, big data, UK tech sector and social media. Our biggest mistake lay in the telecoms sector and related to net neutrality, but that theme may yet unfold as we forecast.

... and it will work well in the future

Over the next 12 months as more new technology cycles hit our screens, it will be even more difficult to navigate the world of Technology, Media and Telecoms.

But fear not. Help is at hand.

Our 2014 Global Trend Forecast Report is your starting point

In our 2014 Global Trend Forecast report, published on 3 July 2013, we list myriad predictions on the global TMT sector. In this report, the second instalment in our Future Trends series, we identify the major disruptive technologies that we will see in 2014 and predict how they will impact the world’s largest technology, media and telecom stocks. If you only have time to read one report on the TMT sector this year, make sure it the CM Research 2014 Global Trend Forecast. It tells you everything you will need to know about technology, media and telecoms for the next 12 months. And it contains scores of global investment ideas, backed up by extensive research.

We are proud of our track record of identifying major disruptive technologies early, forecasting how they might unfold and predicting some of the winners and losers.

Our most recent research is available only to our clients. Some of our older research, however, is available on the publications page of our website. For a summary of last year’s investment ideas, have a look at our “2013 Global Trend Forecast”, published in September 2012.

If you find our predictive analysis of value, please call me to discuss how we might be able to help you.

Cyrus Mewawalla [email protected] +44 (0) 20 3393 3866

www.researchcm.com

SYNC, Issue 65 Predictive Analysis from CM Research 24 July 2013

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What we got right in 2012/13 Here is a summary of the top ten predictions we got right over the last two years.

1. Mobile Internet In “10 Tech Predictions for 2013” (23 January 2013) we highlighted that maps would become the new battleground for supremacy in the mobile internet. Since then Google bought Waze for $1.2bn despite owning the leading maps software. Some analysts say this was just to prevent Apple and Facebook (who was in talks to buy Waze too) from acquiring a maps app.

Looking ahead, the owners of the three best mapping software tools today are Google, Nokia and TomTom. This year, we believe TomTom, in particular, remains a takeover target. Maps are important in mobile commerce because Internet companies profit by building up personal profiles of us to allow them to target services to us. Knowing where you are and tracking where you have been every day over the last five years helps to build that profile.

While TomTom has not been able to exploit its maps software because it has no broader internet ecosystem, others like Apple, Amazon, Facebook, Tencent and Alibaba will find its maps assets attractive, especially with a market cap of just €906m.

2. Connected devices In “HTC vs. Google” (10 May 2011), we predicted HTC was overvalued and was on the verge of collapse because of an asymmetric relationship with Google and its lack of an in-house operating system. Since then HTC has fallen 80%.

In “Smartphones” (29 June 2012) we predicted that Huawei would threaten the dominance of western mobile handset makers. In the four quarters since then, Huawei’s market share has remained steady at around 4.2% of smartphone shipments. But in Q1 2013 China accounted for a third of smartphone shipments. Huawei, ZTE and Xiaomi are gaining market share in China and pushing average prices down … impacting Apple (which sees China as a growth market) more than Google.

Looking ahead, in “The Future of Technology, Media and Telecoms (July 2013) we predict that several new entrants will create their own mobile ecosystems, either using a mobile operating system or a mobile web browser as their entry platform. They include Amazon, Jolla, Mozilla, Alibaba, Huawei, UCweb, Easou, Twitter, Facebook, Tizen, Ubuntu and Yahoo. Some of them may be successful. If they are, Google (which depends more on its still dominant search engine) is less likely to be hurt than Apple (which depends on its expensive operating system which drives device revenues). Moreover, Apple’s first mover advantage in terms of its app ecosystem (with 900,000 native iOs apps) will be rapidly eroded by HTML 5 technology which allows new platforms to have access to standardised web-based apps.

3. Cyber-Security Yesterday, Cisco bought Sourcefire for $2.7bn. In “The Future of Technology, Media and Telecoms” (July 2013) we highlighted Sourcefire as a prime M&A target. Earlier, in “Cyber Security” (23 May 2013), we also named Sourcefire as a beneficiary of the race to build software ecosystems.

This software ecosystem trend will benefit the entire software sector for the next year or so. We continue to believe that software is the most undervalued sector within global tech and that within software, cyber-security sector is the most undervalued element.

Application software stocks like Advent, Ansys, Citrix Systems, Concur Technologies, Dassault Systemes, Intuit, Jive, NetSuite, Opera, Red Hat, Sage, VMware and Ultimate Software are likely to outperform over the next 12 months.

As are cyber-security software companies like Fortinet, ProofPoint, Palo Alto Networks, Verint Systems, Check Point Software, Qihoo 360 and Trend Micro.



4. 3D printing In “3D Printing” (9 April 2013), we predicted that the two leading 3D printer manufacturers – 3D Systems and Stratasys – were overvalued. Since then these stocks have moved sideways.

We also predicted that the best way to play the 3D printing theme was to invest in 3D computer aided design (CAD) software developers Dassault Systemes, PTC Corp and Autodesk. Since then Dassault Systemes and PTC are up by around 20%, although Autodesk is down 10%.

We continue to believe these three CAD stocks will outperform in the next 12 months.

5. Mobile payments In “10 Tech Predictions for 2013” (23 January 2013) we forecast that cloud-based mobile payment platforms would overtake Near Field Communications (NFC) technology. The investment implications were that software based mobile payments platforms like eBay, Square and Alibaba would win and NFC chip based platforms like Google wallet and those supported by most telecom operators would lose. Six months on, this prediction is appears correct.

Looking ahead we forecast that Google will ditch NFC and come up with its own cloud-based mobile payment platform, but its decision to back the wrong technology will cost it dearly. Apple will also introduce a cloud-based mobile payment technology. Monitise, a leader in cloud based banking platform solutions, should benefit too. In China Alibaba and Tencent – the number one and two players in online payments – are likely to lead in mobile payments too.

6. Robotics In Robotics (26 April 2013), we predicted that leading industrial robot makers like Fanuc and Kuka would move sideways as demand for industrial robots stalled.

In the personal robot space we picked iRobot as a winner and in the healthcare sector we predicted Mako Surgical would rise, but Intuitive Surgical would be weighed down by litigation concerns. Our calls have been spot on.

7. Internet advertising In “Google vs. Baidu” (22 February 2012), we forecast that Google was undervalued and Baidu was overvalued based on our estimates of their maximum potential top line growth. Since then Google is up 50% and Baidu is down 30%.

8. Big Data In “The Beginner’s Guide to Big Data” (15 October 2012), we concluded that there was no clear winner yet in terms of data analytics software capable of solving the Big Data problem. Internet companies like Amazon, Google and Facebook were the best in terms of fast, reliable in-house analysis of Big Data, but this theme alone was not a reason to buy them.

We argued that investors who wanted exposure to the high-growth Big Data technology cycle could only pick one stock: Informatica is an IT services company that specialises in implementing Big Data solutions for enterprises. Since our report, Informatica is up 45%. It continues to remain on our conviction Buy list.

9. UK Tech Stock Picks In “UK Tech Stocks to Watch” (20 November 2012), we picked four UK technology stocks that we believed to be winners. They were Monitise (a mobile banking software platform), Bango (a mobile payment platform), Innovation Group (insurance industry software) and Earthport (cross-border payments processor). Since our



report, Earthport is up 60%, Innovation Group is up 40%, Monitise is up 10% and Bango is flat. Looking ahead, Monitise remains on our conviction BUY list.

10. Social Media When Facebook floated onto NASDAQ in May 2012 we forecast that it was overvalued in “The Facebook Conundrum”. It is trading today at 45% below its IPO price.

What we got wrong Our weakest call – thus far – has been on net neutrality.

Net neutrality In “Net Neutrality” (10 June 2011), we argued that the principle of net neutrality – which provided that telecom operators like AT&T were forbidden from charging internet content providers like Google and Facebook the full cost of charging their data traffic – would fall apart. We concluded that if net neutrality rules – which were enshrined in law in the USA, Netherlands and a handful of other countries – were relaxed by regulators then telecom operators in those countries would see earnings upgrades.

Net neutrality has become a topical subject since then, but events have not transpired as we predicted. Whilst US telecom operators like AT&T and Verizon are up 20% since our report on the back of their near duopoly in the US, European operators have been weighed down by the EU debt crisis and by an aggressive EU regulator and net neutrality has not been much of an issue in Asia.

Looking ahead, net neutrality still has a long way to go and is an investment theme investors should pay attention to. Regulation in the telecoms sector will continue to be difficult to predict, but one thing is for sure. Investment in telecom networks will slow down unless operators are certain they will reap a decent return on their investment. Mobile operators today see data traffic rising at around 100% per annum but data tariffs broadly static. That is a recipe for bankruptcy. At some point, regulators will have to address the issue of net neutrality. We continue to believe that at some point regulators will have to find a way of allowing telecom operators to charge internet companies like Apple and Google a tariff that bears some relation to the data traffic that they are asked to carry.



About CM Research CM Research is an independent research provider with a blue chip list of institutional clients. We analyse emerging trends in the technology, media and telecom sectors and develop them into global investment themes, highlighting the winners and losers. Our focus is on disruptive technologies. Our clients include institutional investors, corporations, consultancies and governments. At a time when many of our competitors have had their reputations mired by conflicts of interest, we fiercely guard our independence. Our business model is based on independence, exclusivity and experience.

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Predictive TMT Analysis from CM Research