By Ichiro Suzuki This is called “the death of value investing”. Tech stocks keep rising leaving the rest of the market behind, leaving the rest utterly undervalued, perhaps. Tech keeps going until one day it doesn’t, but this is how it was felt already In 2015. It is still going five years later. Often, these selected number of intensely technology-driven companies that are carrying the market are called FAANG+M (Facebook, Apple, Amazon, Netflix, Google and Microsoft). To be more precise, they should be FAANG+MNT to add NVIDIA and Tesla. The high-flying EV makers is not even in the S&P500 due to its lack of track record of reporting profits. At $380 billion in market capitalization as of August 21, Tesla is more than 80% larger than Netflix, the smallest of the bunch. These companies are driving the market in a way no one small group has ever done before. It is easy to dismiss their rise as a bubble. If it is not, however, it is a proof that technology is changing our life in an unprecedented, revolutionary fashion. And this is probably not a bubble. The late 20th century tech bubble was also called a TMT bubble that encompassed telecom, media and technology sectors. The bubble drove up shares of everything that was associated with these sectors, including AT&T, Vodafone, NTT, Nokia, Walt Disney or Panasonic. The frenzy was so indiscriminating that it was easy to make money, on the way up to the market’s peak. Since every country has its own telecom operators and TV stations, Europe and Japan had a strong participation in the frenzy. It was a genuine bubble. Once the bubble had popped, these companies’ shares fell more quickly than they rose. After all, the market had fully realized how dull many of these companies’ businesses were, perhaps with the exception of Disney. 20 years later, this boom is strictly focused on the companies that are really changing the world and is U.S.-centric. The market is not buying dreams, and is lifting shares of those that are minting money or those with a strong potential to do it. The highly heralded Uber is not a part of this party as it continues to burn cash. Europe is completely shut out of the boom due to the absence of genuinely innovative companies. 20 years after the tech bubble, the market is now capable of telling the ones that change the world from the ones that don’t. While Europe has no place in it, there are limited number of participants from Asia, including Alibaba, Tencent, Samsung, Sony and Taiwan Semiconductor Corp (TSMC). Amid the developing Tech Cold War between the U.S. and China, Asian chip makers’ strategic importance is gaining momentum. It is East Asia where semiconductors are made at factories. U.S. chip makers have gone ‘fab-less’ in the early years of the 21st centuries, focused on chip designing and leaving manufacturing to someone else. Only Intel continues to produce its own microprocessors, as the last one to make chips in Bay Area, holding on to the tradition that makes the area called Silicon Valley. Then, Intel has recently mulled an idea of employing a contract manufacturer, most likely TSMC, for their chips, in response to the production headwinds they are facing. Founded by Morris Chang, Texas Instrument engineer, who returned to Taiwan from Silicon Valley in the late 1980s, TSMC is a titan in contract semiconductor manufacturing with a 55% market share. Its equity market capitalization at $380 billion is almost twice as large as Intel’s $200 billion. In fact, TSMC’s value rose 50% from the height of the tech bubble in 2000 whereas Intel is stuck at where it was back then. Samsung grew stunning ten fold since the height of the bubble. It dominates in the business of dynamic random access memories (DRAMs) and is also a major player in contract semiconductor manufacturing. Samsung crushed Japanese chip makers at the turn of the century in a fiercely capital intensive and high operating leverage business, with its bold decision to deploy capital aggressively. From the perspective of the Tech Cold War, it is its semiconductor divisions that make Samsung matter to the U.S. camp, though the Galaxy smartphones also made immense contributions to Samsung’s bottom line in the last ten years. (Apple’s iPhone continues to dominate the smartphone industry, capturing two-thirds of the profits in the space, despite selling fewer handsets than competitors. Samsung has got most of the rest of the profits. All others are at best making some small profits or unprofitable by cranking out shiny phones.) Sony has made a miraculous comeback from a long, deep crisis after the burst of the tech bubble. While Sony's market capitalization has recovered $100 billion for the first time in 20 years, its value still stands at almost half of its peak but is ten time as much as it was at its nadir about ten years ago. It is truly rare that a tech firm that fell that hard comes back. It is image censor chips that turned around the struggling company, in addition to aggressive cost-cutting by shutting down unprofitable gadgets product lines. Since the 1960s Sony has been producing its own image censor chips for its camcorders (video camera recorders) and those chips have gained a spotlight amid a rise of smartphone cameras (and security cameras, too.) The company is ahead of the pack in these chips and is a major supplier to Apple’s iPhones. As the Tech Cold War is in progress, and the White House is denying China’s access to semiconductor technologies, these Asian chip makers stand at the cornerstone for the Western camp, along with U.S. chipmakers/ designers such as NVIDIA, Intel, Advances Micro Devices, QUALCOMM, etc. (NVIDIA cofounder and CEO Jensen Huang is Taiwanese.) As China continues to struggle in their own semiconductor technology, It is imperative for the U.S. to hold onto the technological edge in this field over China. A curtain has fallen between the two camps, and Huawei is being shut out not only of 5G infrastructure in the U.S. and its allies but also of an access to semiconductor technologies that enable Huawei equipments and handsets to function. As a privately held company, the magnitude of the financial damages inflicted by U.S. sanctions is hardly known. It is perhaps Huawei’s fault not to have made the company more transparent by becoming a public company in order to assuage suspicions, however outrageous U.S. sanctions may be. Alibaba and Tencent ranks among the world’s ten largest companies. Both are dominant player in the domestic Chinese market that is the second largest economy on the planet. Long before the wall, China has shut out Google, Amazon and Facebook out of its domestic market for security reasons, thus securing the position of its own competitors. While the wall protects their own turf, it also limits Chinese companies’ growth potential outside the country. They might eye on the developing countries in Asia, the Middle East and Africa, but relatively low income levels in these markets limit their earnings potential for the foreseeable future. (After all, Apple still dominates in profits in the smartphone markets and their related services, despite their much diminished market share in terms of a number of handsets sold. Wealth of the customers matters.) After a stunning surge during the tech bubble 20 years ago, India has become a quiet place in terms of equity market performances. Infosys is trading essentially at the same level as it did 20 years ago. Led by Infosys, IT consulting and outsourcing firms represent India’s place in the global tech sector. Recently these companies’ growth potential does not look as bright as it looked in the past, as Corporate America Is changing directions from offshoring to reshoring. Competition has grown in this field with new entrants from the developed countries’ firms. Though Indian engineers continue to shine in Silicon Valley, Indian firms have lost their luster in recent years. About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.
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