Netwealth educational webinar - It’s not all about FANGA: Why advisers need to consider other global growth industries for client portfolios

It’s not all about FANGA:Why advisers need to consider other global growth industries

Presented byTheo MaasPortfolio Manager Global SMA Arnhem Investment Management

17 Nov 2016

| Netwealth

Housekeeping

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| Netwealth

Meet today’s speaker

Theo MaasPortfolio Manager Global SMA

Arnhem Investment [email protected]

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Agenda

www.arnhem.com.au 4

1. The FANGA stocks: Alphabet rules2. The world is bigger: Cars go wild

3. The world is bigger: A new reality

4. Arnhem Global SMA’s5. Q & A

1. FANGA stocks: Alphabet rules

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The FANGA stocks

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• These 5 stocks seem to dominate most global equity related news stories

• With a combined market cap of US$2 trillion, they are bigger than Italy and only marginally smaller than the UK economy

• Since Jan-15 they have added 91% on average, or US$600bn of market cap in total

• We do not believe that this run will continue and have just 1 of the 5 in our global SMA portfolios: Alphabet

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Amazon Alphabet (Google)

Netflix Facebook

Apple

Source: Capital IQ

Alphabet

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Industry Analysis

• Unique position in Search based advertising with close to 100% market share

• Video Advertising (YouTube) and Mobile Advertising are the two main growth segments

• Social Media remains the missing piece of the puzzle

Company Analysis

• 90% of revenues comes from Advertising

• Large portfolio of potential profit pools (Cloud, Assistant)

• New CFO is cleaning up the excessive cost structure and ‘Other Bets’ portfolio

• P/E multiple has expanded, but still underestimates the growth profile

Source: BBC, Capital IQ

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Apple

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Industry Analysis• The smartphone industry is very competitive with high returns

attracting new entrants – particularly from China• Smartphone replacement cycles are lengthening (2 years +) due

to lack of innovation• IOS is losing share against Android Company Analysis• Apple’s profitability is very (70%+) dependent on the iPhone• New products (Watch, Car) or Services (iCloud) are not material• How will Apple use its US$250bn of cash?• With Revenue/EPS going backwards (10% in FY2016), Apple has

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Source: Statista, Capital IQ

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Amazon

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Industry Analysis

• Online Retail market is highly competitive; low barriers to entry yet high barriers to be competitive

• Penetration of e-commerce is still low (<10%) in most developed markets

• The Cloud market is growing exponentially (the Netflix effect), is highly profitable and capex intensive

Company Analysis

• If we could only buy AWS (Amazon Web Services)…

• The online retail business is either growth or margin. Prime membership might change this

• Omni-channel favours the bricks-and-mortar players

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Facebook

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Industry Analysis

• Social Media is the fastest growing advertising medium

• Facebook (WhatsApp, Instagram) dominates, but Snapchat and the Chinese players are coming

• Given its short existence (less than 5 years), we do not know the willingness of users to endure advertising

Company Analysis

• Facebook has done a brilliant job in acquiring potential competitors

• The market is pricing in a significant step-up in revenue per user for Instagram and WhatsApp

• Where does the ‘cool crowd’ go when this happens?

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Netflix


Industry Analysis

• The SVOD (subscription video on demand) has been created by Netflix

• It has created a significant strain on telco infrastructure and pressure on Pay TV (cord cutting)

• Rising competition (Amazon, Hulu, HBO) and demand for original content has put pressure on content costs

Company Analysis

• The company continues to leak cash outside the US

• Apple and Google are flexing their muscles

• What if Netflix actually has to pay one day for the bandwidth they consume?

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2. The world is bigger: Cars go wild


Automotive related trends:


1. Emission control

• Government driven shift to cleaner and more efficient cars

• Combustion engine remains a major contributor to greenhouse gas emissions

2. Safety

• Government driven requirement for improved safety

• Despite seat belts and airbags, cars continue to kill and injure

3. Autonomous Cars & On Demand Mobility

• (Semi) Autonomous driving is fast becoming a reality

• The Uber model is changing driving habits and car ownership

Emission Control


• Cars are material contributors to Greenhouse Gas emissions (29% in the US, just behind electricity generation)

• Most developed countries have developed emission targets

• Fuel efficiency is the easiest way to reduce emissions (Direct Injection, Turbocharging, Advanced Transmissions, 48 Volt Battery)

• Electrification of the powertrain is likely to be the most effective tool to reduce emissions (hybrids, fully electric, fuel cell)

• Weight reduction has less impact, but easier to achieve (new material like carbon fibre reinforced plastic)

Tesla is a direct play on electrification, but:

- Can they really deliver on the 500,000 units they promised?

- Are battery costs dropping fast enough to make the Model X profitable?

- Is the Giga Factory going to economically produce enough batteries?

- Are they able to fill the cash gap at Solar City?

- Is the market far too optimistic on all these questions? Yes!

Continental AG is one of the leaders in ADAS systems:

- The tyre business is now less than half of the overall business

- Continental have signed up nearly every car manufacturer in the world

- The growth in ADAS will shift the portfolio further towards higher growth

- The market is still valuing the stock as an old industrial (11x FY16 earnings)

Safety


• Over 1.25m people die in road accidents every year (The US has twice as many fatalities when compared to Europe)

• While seatbelts and airbags have brought these numbers down, there is a view that smartphones are the new danger

• Assisted Braking Systems (ABS), Electronic Stability Control (ESC) are now mandated in many countries

• Advanced Driver Assistance Systems (ADAS) are the next step, with technologies like 360 degree camera/sensors

• As a result, electronic componentry will be moving up rapidly from $300 a car to likely $1000+

Autonomous Cars & On Demand Mobility


• Fully Autonomous (Google, Tesla) cars are available, but still not commercially and legally viable

• Various forms of semi-autonomous cars will rapidly be rolled out (Volvo Autopilot)

• Furthering the need for even more ‘smarts’ in the car

• Uber has dramatically changed driver behaviour and the need for car ownership

• On demand models significantly increase car utilisation and make electrification more economic

• The ultimate goal is creating fully autonomous shared cars

• The media industry would love to fill that newly freed up time “behind the wheel”

Nvidia is a leading graphical processing unit GPU provider:

- Nvidia dominates GPU market for PC’s

- A GPU is however an ideal candidate as the ‘brain’ of the car

- This is a new and fast growing market for Nvidia

- The recent deal they signed with Tesla demonstrates a superior product

3. The world is bigger: A new reality


A new reality


Augmented Reality v Virtual Reality

• What is the difference?

• Which technology has the most potential?

Is Pokémon Go the beginning or the end?

• Did Nintendo discover gold?

• What’s next in mobile apps?

Consoles or game content?

• Lessons from history

• Playstation or Call of Duty?

Memory, CPU’s and GPU’s

• A deeper look at the food chain

• Capex intensity, profitability and sustainable growth

Augmented Reality v Virtual Reality


• Augmented Reality (AR) blurs the line between the real and the digital world. It augments reality with a digital layer. Like playing Pokémon Go, it typically needs a smart screen

• Virtual Reality (VR) replaces the real world with a digital one. To be fully immersed in this world, you will need to typically cover your eyes and ears with a special headset

• The biggest difference between the two technologies is the amount of hardware that is needed

• AR is here and now. Smartphones or car windows are ideally suited to project additional information

• VR is still in its early days. Either the experience is subpar (Google Cardboard) or you need to hook your headset up to a supercomputer (Occulus). Faster, more efficient chips are needed to make it affordable and take the experience mobile. Source: Samsung

Is Pokémon Go the beginning or the end?


Source: Pokémon Go app (Screenshot iPhone Theo Maas)

• Pokémon Go is the surprise hit of 2016. It was the fastest (7 days) application ever to reach 10m downloads

• In a tulip-like bubble, investors made the mistake of assigning all the benefit to Nintendo and the share price doubled. The problem is that Nintendo is a minority shareholder in Pokémon and Niantic (a Google spin-out), were the developers

• What the game did show is the power of AR combined with the power of the current generation of smartphones. All you need is a camera, GPS and a smart application to get tens of millions of consumers off the couch

• Furthermore, it showed that successful content can be repackaged for a new experience. Nintendo still has Super Mario up its sleeve

Consoles or game content?


• The console market has a long history of non-profitability. Sony, Microsoft and Nintendo have used the hardware as loss leaders to compensate with selling their software

• The current consoles (Playstation, Xbox) have introduced elements of VR and AR, but its early days

• The gaming content market has grown into a US$100bn market and continues to benefit from new platforms

• Activision and Electronic Arts dominate this industry and have launched many successful franchises

• VR and AR open up a whole new market, where current content will be repackaged (like Pokémon Go)

• Smartphone apps will be driver of growth

Memory, CPU’s or GPU’s


• AR, but especially VR demands a lot from the hardware, i.e. fast chips and lots of memory

• The Memory market is the worst of two worlds: highly commoditised and very capital intensive. Due to this, the industry is very cyclical. While demand for data capacity is growing rapidly, price per gigabyte is coming down just as rapidly

• The CPU (central processing unit) market is currently dominated by Intel. While VR demands a lot of raw processing power, the CPU is not the weakest link. We expect other competitors to enter (ARM-based)

• The GPU (graphical processing unit) market is dominated by Nvidia. This chip is the key driver of performance and users are more than happy to pay for the latest and greatest

4. Arnhem’s Global SMAs


Arnhem’s SMA Solutions on Netwealth


Delivering true equities diversification to Australian investor portfolios

Global EquitiesGrowth

Australian

EquitiesFranked income

Global EquitiesGrowth

Arnhem Australia+Balanced Exposure

Arnhem Global Growth

Complementary Exposure

Income and growth portfolio designed for investors who need to balance income requirements with longer term capital growth demands.

The portfolio targets a 4% gross yield.

Growth portfolio designed for investors with an existing direct domestic equity portfolio.

Provides capital growth potential with genuineequities diversification.

5. Q & A


Disclaimer


This presentation may not be copied or distributed or passed on, directly or indirectly, to any person without the express consent of Arnhem Investment Management Pty Limited ABN 17 129 606 775, AFSL 332484 (Arnhem). This presentation is produced for general information only and shall not constitute an offer to sell or any type of solicitation or form the basis of or be relied upon in connection with any contract or commitment whatsoever or be taken as investment advice. You should seek your own professional advice in relation to investments in the funds presented.

In New Zealand, Arnhem is an exempt provider under the Financial Advisers Act 2008 that is permitted to provide financial adviser services to wholesale clients as overseas financial advisers as it does not have places of business, and does not provide any financial adviser services to retail clients. In New Zealand this document is only being provided to institutional investors whose principal business is in the investment of money or persons who, in the course of, and for the purpose of their business habitually invest money, or are wealthy and experienced in investing money or are experienced in the industry or business to which the securities relate, or are otherwise not members of the public for the purposes of the Securities Act 1978.

The information contained in this presentation has been compiled to furnish you with an opportunity to examine and evaluate the funds mentioned. Arnhem has not considered the specific investment objectives, financial position or needs of any specific recipient. While great care has been taken to ensure that the information is accurate, Arnhem, to the extent permitted by law, disclaims all responsibility and liability for any omission, error, or inaccuracy in the information or any action taken in reliance on the information and also for any inaccuracy in the information contained in the presentation which has been provided by third parties. Past performance is not necessarily indicative of future performance.

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Economy & Finance

Netwealth educational webinar - It’s not all about FANGA: Why advisers need to consider other global growth industries for client portfolios