Artificial Intelligence is a Mega Trend, but who are the beneficiaries?

“It’s true that we have the largest retail platform globally, but it doesn’t necessarily mean that we are a retail company. Alibaba is a data company.”
Jack Ma, Chairman and Founder, Alibaba.

What are the investment themes that flow from AI and how these themes drive investment decision making?

Data fuels Artificial Intelligence (AI), a thematic that Nick Griffin, CIO of Munro Partners and manager of GSFM’s Munro Global Growth Fund, believes will persist for many years. In this article, Nick discusses the investment themes that flow from AI and how these themes drive investment decision making.

In layman’s terms, Artificial Intelligence (AI) is simply taking volumes of unstructured data and plugging it through a ‘big computer’ to give the user a predictive outcome that enhances their experience. The simplest forms today include the dynamic news feed on your Facebook profile, predictive shopping results on Amazon, or Google maps highlighting the time your daily trip to work will take, before you asked for it.

Ultimately in its full form, AI is likely to penetrate all businesses globally, and provide advertisers, consumer product companies and even industrial companies with better outcomes and insights for the same dollars spent. Consequently, Munro believes that the AI facilitators have structural growth tailwinds that will persist for multiple years to come.

We see two primary facilitators of artificial intelligence. Firstly, the connectivity companies that provide the technological infrastructure to connect with, receive and compute all the volumes of data in real time i.e. the pieces that build the so called ‘big computer’, and secondly, the data companies that own the proprietary data sets that fuel AI to provide the required corporate insights.

Connectivity

Connectivity between devices (including phones, homes, cars, industrial equipment, and health devices, to name just a few) and the network (cloud) is growing at an exponential rate. Data generated by all these connected devices can now be analysed and interpreted in real time by emerging artificial intelligence applications.

This is now an ‘Arms Race’ to connect and interpret the global economy on a real-time basis and as such we look to the ‘Weapons Manufacturers’ in silicon (memory) and network providers (cloud, internet companies) as the key beneficiaries of this trend.

Figure one illustrates the sub-trends and winners from the broader Area of Interest (AoI) that is connectivity.

Since 2000, the demand for silicon wafers has increased for a range of products, particularly in smartphones where demand has increased seven-fold. Emerging technologies in the connected car, home, cloud and Solid State Drives (SSD) suggest growth is broadening beyond smartphones and is becoming less cyclical as end markets broaden beyond consumer electronics to cater for emerging AI trends.

Consequently, we see a range of previously highly cyclical semiconductor companies or parts of the semiconductor value chain as the key beneficiaries of this trend as their returns grow more consistently and sustainably as the network for powering AI is built out.

Key globally listed names we see as beneficiaries would include: ASML (Equipment), Applied Materials (Equipment), Micron (Memory), Hynix (Memory), Samsung (Memory), Microchip (Semiconductors), Infineon (Semiconductors), Skyworks (Semiconductors), Sumco (Wafers), Siltronic (Wafers) and TSMC (Foundry). Some of these names are current investments in the Munro Global Growth Fund.

Data

The second key component of building AI is data. Data is the fuel that drives the predictive outcomes and consequently we see any company that owns a large dataset as likely to be more valuable in an AI world. Clearly the key internet players in Google, Amazon and Facebook are in the box seat, but many other companies possess datasets that cannot be replicated by the internet giants.

The credit bureaus are one such example. Credit reporting agencies own unique datasets and products, and credit agencies have been collecting data on individuals since before the internet existed. The major credit agencies (Equifax, Experian and Transunion) have been pivotal to enabling mortgage, credit card and auto financing for years.

Today their datasets extend to other verticals including employment, healthcare, insurance, and utilities, and ultimately have become relevant to Silicon Valley and the Artificial Intelligence revolution. Essentially, they build the dataset, technology and platform once and sell it many times over to many different corporates across a range of industries.

Figure three provides an example of a stylised database owned by a credit reporting agency (Equifax). It shows their Employee Data Exchange and network effects around the database whereby the database becomes stronger as more companies contribute data and more verifiers access the data. This constant strengthening of the dataset drives more customers to the database, in turn further improving the database.

Consequently, we see a range of companies with key data sets that are likely to become more valuable over time as we move to an AI driven world. We ultimately see these data sets demanding strategic valuation multiples as the race to provide the best AI capabilities heats up.

Key globally listed names with unique data sets we like include: Equifax (Credit Bureau), TransUnion (Credit Bureau), Experian (Credit Bureau), S&P Global (Financial Data provider), MSCI (Financial Data provider), Moody’s (Financial Data provider), London Stock Exchange (Financial Data provider), IHS Market (Market Insights), Gartner (Market Insights), Rightmove (Real-Estate Portal) and Autotrader (Car Sales Portal). Some of these names are current investments in the Munro Global Growth Fund.

What are the characteristics of great growth companies?

Within the Artificial Intelligence universe, Munro looks for five characteristics that identify a great growth company. Amazon, a beneficiary of the AI growth trend, is used to illustrate each point.

1. There has to be growth. The business must be one where the total addressable market is growing, that is gross sales or revenue must be growing faster than GDP. This is what is commonly referred to as a tailwind.

Global retail e-commerce sales at Amazon are expected to grow at approximately 20% per annum.

2. There has to be economic leverage, the business needs to be able to grow its earnings faster than revenue, indicating efficiency increases and therefore increased profits.

Amazon’s current margins of less than 5% are very low and likely to increase as the network effects from their increasing sales kick in.

3. It needs to be sustainable. Growth must be sustained over a three to five-year period.

E-commerce is set to continue to expand with continued technology growth and ease of delivery. Amazon, as the dominant player, is expected to continue capturing market share.

4. There needs to be a controlling or aligned shareholder. We find strongly aligned management or controlling shareholders consistently win versus non-aligned management, and often when nobody expects them to.

Amazon’s CEO Jeff Bezos controls almost 20% of the company’s shares.

5. The product must have great customer perception. Measuring customer perception allows us to do the fundamental research that tells us that something’s going to happen before it appears in the numbers.

The membership service for Amazon shipping and streaming, Amazon Prime, is growing at 35 percent a year. Amazon makes up a staggering two-thirds of all new e-commerce growth in the US market. Each of these five characteristics played a role in making that happen.

Munro’s investment process seeks to identify listed companies with the ability to grow at a faster rate and a more sustainable basis than the peer group. We have highlighted two Areas of Interest that are front and centre in the AI revolution, ones which the Munro Global Growth Fund has made portfolio positions.

We believe this structural trend towards companies investing in AI will drive structural earnings growth for our key beneficiaries and ultimately, result in positive investment returns regardless of what the market cycle brings in the short term. It’s important to note, it is virtually impossible to find beneficiaries of this theme if only investing in the Australian market.

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The information included in this article is provided for informational purposes only. The information contained in this article reflects, as of the date of publication, the current opinion of Munro Asset Management Limited (ABN 28 163 522 254, AFSL 480509), product issuer of the Munro Global Growth Fund (ARSN 612 854 547) and is subject to change without notice. Grant Samuel Funds Management Pty Limited ABN 14 125 715 004 AFSL 317587 (‘GSFM’) has a distribution arrangement with Munro to represent their products in the Australia and New Zealand markets. You should consider the product disclosure statement before making a decision to acquire or continue to hold an interest in the Munro Global Growth Fund. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither Munro Partners, Grant Samuel Funds Management, their related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article.