Tech is the New Macro

Tech is the New Macro

We have entered a new Digital Age where the rapid expansion and implementation of technological innovation has become a key factor in the behavior of the economy and capital markets. This new era is marked by the transition from “atoms” to “bits,” resulting in a capital-light economy in which technology is being substituted for labor and physical assets. Fueling this transformation is data, an imperative resource and what we have labeled as the “new oil.” We have written extensively on this topic and the implications for business and investors in the years to come.

“What is your business strategy in the digital age?” has become one of our favorite questions to ask management teams.
If a company cannot provide a convincing response, we believe it will likely flounder and ultimately disappear.
– William Priest, Executive Chairman, Co-CIO and Portfolio Manager

       
White Paper – August 19, 2020   White Paper – January 31, 2018  
The Pandemic Accelerant: Digital Age Business Strategies When “Bits” Meet “Atoms”  
 
The last six months have been profoundly transformational, with the COVID shock acting as an accelerant for the digitization of the economy.   The Digital Age and the transition from “atoms” to “bits” implies a capital-light economy in which technology is being substituted for labor and physical assets. Its impact is widespread and stretches beyond the technology sector.   
       
White Paper – June 19, 2019   White Paper – August 10, 2017  
Blitzscale and Hope: Unicorns, IPOs And The Fear of Repeating the Late 1990s Tech is the New Macro – Part II: Implications For Labor Markets And Productivity
   
The current hype about two-sided digital platforms, blitzscaling and winner-takes-most markets has fueled a surge in IPO listings and produced stratospheric valuations that are difficult to reconcile with free-cash-flow (FCF) fundamentals.   

The rapid expansion and implementation of technological innovation has become a key factor in the behavior of the economy and capital markets. In this paper we explore how platforms and their network effects have resulted in a winner-takes-all market.

 
       
Insight – December 10, 2018   White Paper – June 29, 2017  
Trump, Tech and Trade Tech is the New Macro – Part I: Impacting All Three Components of Return on Equity
   
China’s mercantilist behavior, underscored by its “Made in China 2025 initiative,” is in conflict with U.S. demands for greater IP protection, a level playing field and improved market access. Left unresolved, free trade and globalization will be in retreat.   The rapid expansion and implementation of technological innovation has become a key factor in the behavior of the economy and capital markets.  
       
Insight – September 13, 2018    
Is e-Commerce a Bubble?
   
While the e-Commerce index as a whole appears frothy, many companies in the sector do possess sound and promising business models. For investors, the key to success is understanding how these business models should be valued.    
       

Our Perspectives

There have been two monumental crises in the past two decades, the Global Financial Crisis and the current COVID-19 pandemic. While the COVID-19 crisis is crippling financial markets in a similar fashion, monetary policy in the form of QE will not be the silver bullet we need. The solution to the current crisis will require prudent fiscal policy to see us through.

March 16, 2020

Comparing Two Market Crises: A New Type of Crisis Requires a New Solution

There have been two monumental crises in the past two decades, the Global Financial Crisis and the current COVID-19 pandemic. While the COVID-19 crisis is crippling financial markets in a similar fashion, monetary policy in the form of QE will not be the silver bullet we need. The solution to the current crisis will require prudent fiscal policy to see us through.

The dispute between the U.S. and China is clearly not just about trade, or even technology. At stake are the values that will determine the architecture and governance of the global world order.

December 2, 2019

Cold War 2.0: The Platform, the Players, and the Stakes

The dispute between the U.S. and China is clearly not just about trade, or even technology. At stake are the values that will determine the architecture and governance of the global world order.

The current hype about two-sided digital platforms, blitzscaling and winner-takes-most markets has fueled a surge in IPO listings and produced stratospheric valuations that are difficult to reconcile with free-cash-flow (FCF) fundamentals. The big question is, are we repeating the excesses of the dot-com boom? In this paper, we look at the reasoning used by those who think history is repeating itself including IPO supply, profitability and VC funding. We also look at the weaknesses in those arguments and why some believe that the current situation is different from the dot com bubble, such as median age of tech IPOs and sales growth. Finally, we explore how investors can look at these companies through a free cash flow lens.

June 19, 2019

Blitzscale and Hope: Unicorns, IPOs and the Fear of Repeating the Late 1990s

The current hype about two-sided digital platforms, blitzscaling and winner-takes-most markets has fueled a surge in IPO listings and produced stratospheric valuations that are difficult to reconcile with free-cash-flow (FCF) fundamentals. The big question is, are we repeating the excesses of the dot-com boom? In this paper, we look at the reasoning used by those who think history is repeating itself including IPO supply, profitability and VC funding. We also look at the weaknesses in those arguments and why some believe that the current situation is different from the dot com bubble, such as median age of tech IPOs and sales growth. Finally, we explore how investors can look at these companies through a free cash flow lens.

Does a stock’s price and its P/E ratio tell you how much a company is worth? Conventional wisdom says yes, but we think otherwise. In this paper we explore:

  • The theory behind the discounted cash flow (DCF) valuation model and the underappreciated role that ROIC plays in the model
  • The P/E ratio and find that it does not tell us what most people think it does, nor does its offshoot, the P/E to growth (PEG) ratio
  • How we can use what we have learned about the DCF model to deconstruct P/E ratios in the real world to better understand what they do tell us
June 17, 2019

The P/E Ratio: A User’s Manual

Does a stock’s price and its P/E ratio tell you how much a company is worth? Conventional wisdom says yes, but we think otherwise. In this paper we explore:

  • The theory behind the discounted cash flow (DCF) valuation model and the underappreciated role that ROIC plays in the model
  • The P/E ratio and find that it does not tell us what most people think it does, nor does its offshoot, the P/E to growth (PEG) ratio
  • How we can use what we have learned about the DCF model to deconstruct P/E ratios in the real world to better understand what they do tell us

If there is a “small-cap effect” then why has the Russell 2000 underperformed the Russell 1000 over time?

January 18, 2019

The Size Paradox

If there is a “small-cap effect” then why has the Russell 2000 underperformed the Russell 1000 over time?

China’s mercantilist behavior, underscored by its “Made in China 2025 initiative,” is in conflict with U.S. demands for greater IP protection, a level playing field and improved market access. Left unresolved, free trade and globalization will be in retreat, with broad economic implications beginning with manufacturers.

December 10, 2018

Trump, Tech and Trade

China’s mercantilist behavior, underscored by its “Made in China 2025 initiative,” is in conflict with U.S. demands for greater IP protection, a level playing field and improved market access. Left unresolved, free trade and globalization will be in retreat, with broad economic implications beginning with manufacturers.

Three developments (the unwinding of QE, the soaring US budget deficit and the impending wall of maturities, especially of corporate bonds) will engender higher volatility and wider credit spreads. There is also a risk that interest rates will start rising for “bad” reasons (that is, an increase in fixed income supply). Each of these outcomes would be a headwind for high duration strategies.

July 2, 2018

The Return of Price Discovery

Three developments (the unwinding of QE, the soaring US budget deficit and the impending wall of maturities, especially of corporate bonds) will engender higher volatility and wider credit spreads. There is also a risk that interest rates will start rising for “bad” reasons (that is, an increase in fixed income supply). Each of these outcomes would be a headwind for high duration strategies.

Modern Portfolio Theory (MPT) dominates investment thinking today, but the pre-MPT view of the world still holds valuable insights. Our new white paper explores the limits of MPT in aiding successful investing.

April 13, 2018

The Limits of Theory

Modern Portfolio Theory (MPT) dominates investment thinking today, but the pre-MPT view of the world still holds valuable insights. Our new white paper explores the limits of MPT in aiding successful investing.