Alex Pollak
(Loftus Peak)
We have written and spoken before about the problems of converting a fossil fuel car company to one that builds sustainable green vehicles. The short answer is that most of the existing plant/outsourced manufacturing becomes obsolete – electric cars have 90% fewer moving parts. There is no need for exhaust pipes, turbos, fuel pumps and the like. The parts that remain are very different, such as regenerative braking systems which use the car’s slowing momentum to harvest energy for the battery, extending range.
How do you tell the head of the internal combustion unit that his or her services, and that of the division, are no longer required – effectively reducing spending in the areas that are currently delivering 99% of revenue, even while the success of the electric car is not assured?
But while the fossil fuel based car making incumbents are finding it tough, we believe that Tesla is ‘priced for perfection’, so we are no longer holders at the present share prices.
Disruption in cars is very visible, but disruption is everywhere, really.
The virus has already driven a dramatic uptake of tools to remotely operate business, health, retail and leisure. It is extending dramatically, even down to the home music system, as well as the doorbell and over time the lights, air conditioning and blinds.
And powering all of this? It was obviously not possible when broadband, either cellular or in-ground, was constrained by inadequate fibre or earlier generations of mobile. But that is all changing, as is the mechanism by which business – any business – operates.
The new architecture of business is decentralised, with compute, storage, memory and applications increasingly housed in the cloud and datacentres. For example, the banking app on your phone is almost certainly cloud-based.
Which raises the question: How is all this possible at scale?
And the answer is a massive increase in processing power. We have written before that Google search processes 67,000 queries per second. That is 5.8b requests in a day. There simply isn’t a global workforce large enough to deal with this volume were it to be done manually.
It is for this reason that datacentre and cloud resources are undergoing enormous expansion, with many of the beneficiaries being companies which are held in the Fund.
All of this is driving the earnings, and therefore valuations of companies engaged in this disruption. Apple recently reported its first ever US$100b sales quarter.
Some of these company valuations are high, a point picked up by the US value investor David Einhorn, who is waiting for the return of more normalised valuations before investing.
Sometimes companies are expensive because they are in a bubble (like GameStop, among others). But other times, where this market is concerned, it is because genuine disruptive change is at play.
Still, we do see pockets of overvaluation, so remain committed to our own disciplined valuation process to help protect investors against holding poor quality assets in a downturn. We believe the portfolio is well-positioned for the generally anticipated sharemarket economic upswing as the impacts of the virus are reined in and people continue to look for better and more cost-effective ways of doing things online, whether it is working, shopping, learning or playing.
IMPORTANT INFORMATION This article was prepared by Loftus Peak Pty Limited (“Loftus Peak’). Equity Trustees Limited (“Equity Trustees”) ABN 46 004 031 298 AFSL No. 240975, is a subsidiary of EQT Holdings Limited ABN 22 607 797 615, a publicly listed company on the Australian Securities Exchange (ASX:EQT), and is the Responsible Entity of the Loftus Peak Global Disruption Fund (“Fund”). This document has been prepared for the purpose of providing general information only, without taking account of any individual person’s investment objectives, financial circumstances or needs. This document is not intended to take the place of professional advice and we do not express any view about the accuracy or completeness of information that is not prepared by us and no liability is accepted for any errors this document may contain. You should consider the Product Disclosure Statement (“PDS”) in deciding whether to acquire, or continue to hold, the product. A PDS and application form is available at www.loftuspeak.com.au. Loftus Peak and Equity Trustees do not guarantee the performance of the Fund or the repayment of the investor’s capital. To the extent permitted by law, neither Equity Trustees, Loftus Peak, nor any of their related parties including its employees, directors, consultants, advisers, officers or authorised representatives, are liable for any loss or damage arising as a result of reliance placed on the contents of this article. Past performance is not indicative of future performance.
