One of the biggest benefits I get from reading and talking to Venture Capitalists is applying their need to live in the future to the stock markets.
Fred Wilson had a great post up yesterday about venture investing and timing. The gist:
My point is that technologies present themselves as interesting investment opportunities long before they go mainstream and figuring out when they are going to go mainstream is a lot about looking for the right packaging.
I would argue that a lot of the time, existing public companies have the right packaging. It may not even be the right actual product, but the packaging is that they are public and just act as a proxy for large hedge funds and money managers to invest in them as a proxy for the technology trend itself.
Some of the best hedge fund investors have been doing this for years. Read this piece on Philippe Laffont
Coatue Management has been ahead of the A.I. revolution, owning large holdings in the industry’s most innovative early adopters like chipmaker Nvidia, search giant Google (Alphabet) and Equinix. Laffont wants over 20% of Coatue’s portfolio weighted to A.I. companies and A.I.-related infrastructure such as data centers and semiconductors. Contrarian ways of playing this A.I. revolution come from companies like Intel, Twitter and AMD who’ve all recently emerged from long bouts of market underperformace.
Since the early 2000s Intel has “been a dog of a stock” with it shares barely budging, but Laffont believes a subtle transformation is taking hold. Some 50% of the chipmaker’s revenues come from data center businesses and soon just a minority of its earnings will be derived from the personal computer market it once dominated. Though Intel’s business mix has changed for the better, its stock is only just beginning to get credit for the transformation.
A.I. may also solve some of Twitter’s biggest problems since it went public in 2012. While Facebook has surged to an over $500 billion market capitlization in the wake of its IPO, Twitter has stagnated at a valuation below $25 billion because the randomness of the Twitter stream has limited its appeal. Laffont believes co-founder and CEO Jack Dorsey is beginning to harness A.I. at the social network to curate relevant content for users. That may solve the randomness issues at Twitter, which may have undermined the broader adoption by users and advertisers.
“This is a multiyear story with a very interesting founder who completely views A.I in the way we do,” Laffont said. “In five or ten years from now could Twitter be a $100 billion or $200 billion company? Absolutely.” AMD, another industry laggard, may fit companies’ interest in owning their semiconductor technology, Laffont added. A crucial piece to his bullishness on A.I. comes from infrastructure that has made algorithm-based insights valuable.
“How can you run an algorithm if you don’t have the data?” Laffont noted of its adoption curve. Now, data centers, archives of data, rising computational power and better memory all mean companies can actually put A.I to good use. Laffont expects data centers to be one of the great growth businesses in technology, citing as evidence Facebook’s recently disclosed plans to spend more than half of its capital expenditures on data centers.
In Coatue’s most recent quarterly filings it owns Twitter shares worth well over $500 million. Coatue didn’t disclose holdings in AMD or Intel as of the year-end 2017 filing. A.I. giants Nvidia and Alphabet, and rising tech platforms Alibaba, Amazon, Apple, Facebook, JD.com and Netflix are among top holdings at $17 billion in assets Coatue, filings show. It is also a top holder of Broadcom.
Philipe makes it sound easy. That’s what makes him so good at his job.
Back to Fred’s piece…the current packaging problem in the venture capital industry is the blockchain and crypto markets. I read that 46 percent of the ICO’s launched in 2017 have already failed. Per Fred:
Blockchain and crypto is in a similar state. Today, other than buying and selling crypto tokens, blockchain applications are clunky and hard to use. Centralized applications are way better than their decentralized cousins. When entrepreneurs figure out how to package up blockchain applications so that they are fun and easy to use, I think we will see them take off. My guess is that it will happen first in gaming and collectibles.
My point is that it is one thing to develop a technology that is superior to the current offerings, but entirely another thing to make it usable by most people. The first part is, in some ways, the more important thing (like Satoshi’s white paper) but the second thing is often where the investment leverage happens.
This problem will get solved but there is also a lot of money positioning itself today (Bitcoin, Ethereum, Nvidia) to ride the trend on the back of the early winners that Fred and other venture capitalists are paid to spot.
Also published on Medium.