Tech stocks: Should I stay or should I go?

Esta semana temos a participação de Tony Kim, gestor de portfólio e líder de tecnologia do grupo Fundamental Active Equity da BlackRock

Foi a maior bolha de todas. Em março do ano 2000, o índice de ações de tecnologia pesada da Nasdaq atingiu o pico da era da Internet. Porém, no segundo semestre de 2002, isso tinha praticamente acabado, juntamente com muitas empresas unicórnio de tecnologia.

Levaria 15 anos para a Nasdaq recuperar suas perdas, e atualmente a história é diferente. As ações de tecnologia estão de volta às manchetes como um setor a ser observado. Neste episódio do podcast “The BID”, Tony Kim, gestor de portfólio do grupo Fundamental Active Equity, discute o que torna o momento atual diferente do passado e por que o setor de tecnologia ainda é um solo fértil para a inovação.

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  • Oscar Pulido: It was the bubble to rival all bubbles. In March of 2000, the tech-heavy NASDAQ Stock Index hit its dot-com era peak. It rose from under 1,000 in 1995 to over 5,000 just five years later. But by the fall of 2002, it was nearly all gone, along with many of the once high-flying dot-com unicorns. Even the well-anchored blue-chip companies weren’t unscathed. Industrial losses were in the trillions.

    It would take 15 years for the NASDAQ to reclaim the 5,000 mark. And today, it sits near 8,000, an 80% increase in just five years. Tech stock are back in the headlines as the sector to keep an eye on. But with euphoria around tech having backfired once before, is it time to take the money and run?

    On this episode of The BID, we speak with Tony Kim, Portfolio Manager and technology sector lead for Blackrock’s Fundamental Active Equity group. We’ll talk about what makes today different from history and why tech is a breeding ground for innovation. I’m your host, Oscar Pulido. We hope you enjoy.

    Tony, thank you so much for joining us today on The BID.

    Tony Kim: Thank you for having me. I love podcasts, pleasure to be on it.

    Oscar Pulido: Well, we’re happy to have you on. And Tony, I was reflecting back on my own investment experience. I think I bought my first mutual fund back in the late ‘90s, and it was a mutual fund that targeted companies that had high growth rates. And in retrospect, they probably owned a number of tech stocks, because that’s what was growing. And the late ‘90s boomed, turned into the bust of the early 2000s. So for me personally, it’s been really interesting to see tech back in the headlines here over the last couple of years. How does the tech sector differ today versus what you and what I invested in two decades ago?

    Tony Kim: I think tech has permeated all aspects of our society. And so when you look back at 2000, it all seems kind of primitive today. When I really think of it, it’s this notion of order of magnitude change. And so, let’s just compare back 20 years ago to today. In 2000, there were half a billion internet users, there’s now close to five billion, so that’s 10x. The number of computing platforms, there was one really, the PC, couple of hundred million. Now, there’s PCs, there are smartphones, there’s IoT, and there is cloud. So that’s over ten of billions of things in the platform, sort of devices. So that’s 100x at least. The number of wireless networks, you had 2G, now you have 5G. That’s three generations of cellular. The transistor density, which is the measure of the density of the performance of the transistors in a silicon chip. Tens of millions back then, now tens of billions so that’s like 1000x, and the leading chip geometry of 130 nanometers is chunked down to 7 nanometers, so that’s 18x. So when you think of that, you put that in totality. It’s this order of magnitude change within 20 years. And as an investor, that’s translated into a sheer explosion in the number of companies, the diversity, the dynamism, and the sheer ambition of these companies is pretty unprecedented.

    Oscar Pulido: It’s clear you have to be good at math if you had been following the tech sector for the last two decades just given the order of magnitude, I think was the term you used, of the change that we’ve seen. It feels like a lot of that change has been a result of the FAANG stocks which is often used to refer to Facebook, Apple, Amazon, Netflix, and Google. They really get the bulk of the attention, but take us beyond FAANG. There must be other companies that are a part of this bigger tech movement?

    Tony Kim: I think for the last 10 to 15 years it’s definitely been all about FAANG and they have personified the market capitalization of tech. I’d also add Microsoft and Alibaba and Tencent, and maybe call it the Super Eight. But like you said, tech is a lot more than these eight companies. There are nearly 1,300 public tech companies globally that I’m looking at and then there are hundreds of late stage private companies that I’m also looking at. So you’re talking well over 1,600 plus companies in tech beyond these Super Eight. So the diversity of companies that are out there, the shared number is a lot more prevalent than in the past and the amount of funding that’s come in to the sector. But I think we also take a step back and look at tech by era. And if you look back in history, every decade generally has been kind of defined by a new era. In the 1990s, it started in the mainframe and a lot of Japanese companies. In 2000, it was the PC and the fiber optic boom, telecom companies. And then in 2010, it was the smartphone and internet companies. And today, it’s about cloud and we also see the emergence of some of the large Chinese companies. And so this diversity of over 1,500, 1,600, 1,700 tech companies out there, something is going to emerge. There is no doubt about that. So I think there is a diversity of companies and history has shown there will be new leadership.

    Oscar Pulido: And when you talk about new companies and new leaders, the word disruption comes to mind. It feels like that word is in our vocabulary these days largely due to the tech sector. So, what in your mind is the next big thing that we can expect from tech and perhaps, as an add-on to that, what do you see the impact of technology being on other sectors of the economy?

    Tony Kim: It seems one of the defining era for the next 10 years is going to be AI in data. I think disruption to me, a lot of it is built on incremental layers from past foundations of tech of what you see is disruption today are really set on prior investments. So we go back to the 2000 era. I mean, that laid the foundation of the rails of the internet that built up the telecom and fiber network. And once you have that, along with that came continual development in silicon and that led to the smartphone and then you had these 3G, 4G networks which build wireless networks on top of the linking the fiber networks with the parallel development in chip computational power, which then led to new software and new architectures, which then led to the cloud. And then finally, if AI is defining the next decade, you know AI research has been around for 30 or 40 years, but it needed fiber networks, it needs the cellular networks, it needs the computational power and you need a new software. All of these things coming together right now seemingly in a big bang, you could call it. And in terms of tech moving beyond, you brought up the notion of tech beyond other sectors. Two paths of evolution for these companies or for looking at tech, one is kind of the core tech and then other is what I called applied tech. Within the core tech, it’s silicon and software. And it’s in this applied tech where you’ll see a lot of these new industries. These are taking these core technologies and applying them to things like transportation, autonomous driving or construction, kind of reimagining value chain for real estate, reimagining the value chain using tech. You kind of build new models for healthcare, farming, customer service on and on. And so you see this expansion of what I call taking these core technologies and applying them to new industries.

    Oscar Pulido: In listening to you talk about AI, this seems to me that there are a number of different parts of this value chain, a number of different companies that are involved in the broader AI investment opportunity because you mentioned silicon, you mentioned software, you mentioned data. Is it fair to say, there is no one company that does all this, you sort of have a number of different ways to invest in this theme?

    Tony Kim: Yeah, that’s correct. This is a concerted effort, all of the component parts need to be kind in unison. You have dozens, hundreds of companies working on software, different parts of software. You have got new companies in silicon. This is the first time in 20 years I’d say in Silicon Valley that I’ve seen kind of this explosion of new silicon startups. I mean, there have been so few semiconductor companies that have become public but you’re seeing a new creation, a new Cambrian explosion, if you will, of compute. And then you have all of these companies that are using the AI. Obviously, you have got probably over a dozen autonomous driving companies and et cetera. So, there is no one answer and then AI is going to be use in kind of everything.

    Oscar Pulido: Tony, let’s switch gears. I want to ask you about cloud computing because I know that you feel that cloud computing will take over or could take over the traditional sort or on-premise infrastructure that companies use for technologies. What are the advantages to cloud computing?

    Tony Kim: I think there are many different aspects as to what cloud computing is, but I think one of the core tenants of cloud is this notion of not having to do it yourself. There is this DIY nature of IT that has been the case for the last 30 years as least, where companies all around the world that have kind of build their own technology data center, their own stack and then had armies of people building and running their own IT. And I think with the advent of cloud, one central advantage is that you can shift a lot of this do-it-yourself nature to kind of a rental nature where you can outsource a lot of this infrastructure to the cloud. This is a concept that has been around for a long time in other industries, i.e. the utility industry, but now it’s come to tech. That’s one advantage. The other is, once you have this kind of infrastructure in the cloud, the applications that run on top of this cloud infrastructure, the ease and speed in which the flexibility to make changes and get software up and running, this is kind of foundational to cloud and it’s really just opened up beyond just the application and the infrastructure, just kind of how software is written. I think there’s been a kind of a revolution you could say and an explosion in software in terms of how it’s built, how it’s developed and how it’s consumed and deployed. And the cloud has enabled – I think Marc Andreessen coined it, “Software is eating the world” and I think the underpinnings of this new cloud infrastructure has enabled this to really blossom and accelerate even.

    Oscar Pulido: And as you mentioned this, the word that comes to mind is efficiency. It seems like cloud computing helps companies become more efficient. As I also think about efficiency, I think about the 5G conversation. It feels like the physical infrastructure to support this technology really has a ways to go. So how close are we to the broad deployment of 5G, and is there a way now to invest in the opportunities that 5G is going to create?

    Tony Kim: I think 5G deployment is imminent. We started with end of last year with Korea and Japan, and now this year, it’s U.S. and China, and then later it will be Europe, and then later after that, it will be emerging markets. We’re very much in the very early stage of deployment. If you look around, I don’t know too many people with a 5G smartphone. I like to deconstruct 5G. I often like to also work backwards, like I often think when will we have a 5G phone and do something with it? I think that really comes in earnest end of next year. I always think Apple will kind of define that, and I do think Apple will have a 5G smartphone by next fall. And if we work back in order, so if that’s when real consumers really get access to 5G phones at scale, when can you start investing in this? Actually, it started last year. You’ve got to first test the network. You got to test all the equipment that you’re going to put into the network. Carriers don’t want to be spending tens of billions of dollars on equipment that is not ready, so you got to test it and then you got to have the fiber and the interconnect and the networks all built out. And then you put in these 5G base stations, and then you’ll have phones, and then those phones will be running and that will lead to more network loading, and so then you’ll need to build more towers, more data centers. And then eventually, you’re going to have all of these new use cases for 5G, all of these new 5G IoT or self-driving cars. So I kind of break it down that way, and then I’ll say, “Well, how do we invest?” We need to invest in, I think what I call the first phase, the building of the infrastructure before we can have that. And then you can have the phones and then applications come on top.

    Oscar Pulido: Well, it’s interesting when you said that you think Apple might have a 5G phone by the end of next year, I started to work backwards myself and think about how far in advance will people be lined up outside the Apple store to get their hands on a 5G phone. But you touched on the U.S. and China as being sort of next in getting the deployment of 5G. Isn’t there a rivalry between the U.S. and China when it comes to 5G? Is there something there that we need to be aware of? Does this have an impact on tech stocks at all?

    Tony Kim: That’s an interesting question. I think there is a “rivalry” in the press on 5G. Actually it’s more deeply rooted than just 5G. 5G just so it happens to be kind of the political football. The core root of the problem is this notion of IP ownership and IP protection. The U.S. wants China to observe international laws and IP rights and protection, and stealing of IP. On the Chinese perspective, I think China covets independence. They don’t want to be dependent on the U.S. And again, it goes back to silicon and software. Let’s deconstruct this, what I call the IP hole that China has if for example for 5G. When Huawei was banned or put on the Entity List, the U.S. government banned the key suppliers to Huawei. This crippled Huawei. So what do you need to ship a 5G phone or a 5G base station for Huawei? Well, you need processors, that’s Intel and ARM and AMD, and that’s not Huawei. Then you need these things called FPGAs that are often in base stations. These are U.S. companies: Xilinx and Intel. And then you need radio frequency chips that go into these base stations for 2G, 3G, 4G, 5G RF. Again, those are U.S. companies: Skyworks, Qorvo. These are not Chinese companies. You need AI acceleration, you need silicon for GPUs and AI accelerators. Again, most of these are U.S. companies. And then to make these chips, you need semiconductor capital equipment and these are lithography, etch, deposition, process control. These are U.S. companies. These are Dutch companies. Some Japanese companies, not Chinese companies. And then you need operating systems to ship around the world. You need Android or iOS. Again, these are dependent on the U.S. And then you need memory, and again, these are Japanese and U.S. companies. And so when you tie it all up together, they have massive holes in IP in a lot of these areas. And when the suppliers are not able to ship to Huawei, this cripples them. And so the Chinese do not want to be put in this situation, so they’re trying desperately to build their own capability. But the problem is it’s not just money. China has money, they have will, they have ambition. The question is, “Do you have the IP to do it all?” And so, again, I think this is kind of the give and take here. It’s this battle of IP ownership, IP protection. China wants some of these things but they need to play by the rules and the U.S. is playing hardball. And so that’s how, in a nutshell, you asked me about 5G and 5G is just kind of the tip of the spear of what the root issue is in my opinion.

    Oscar Pulido: And it feel like a good time to ask you, Tony, with everything you’ve said, if you had to sum up the tech sector in one sentence, what would it be?

    Tony Kim: If I were to answer that question, Oscar, I’d say tech is about creative destruction. I think tech is like biology, like nature. You grow fast, you mature and then you die and there’s always a new company coming to take your spot. In fact, I’ve tracked in the last five years over 200 IPOs in tech globally. History has shown us that there will always be new companies. And so I think it’s my duty to continue to find and seek those companies out.

    Oscar Pulido: Survival of the fittest, I think is what I’m hearing you say.

    Tony Kim: Constant evolution, yes. You need to constantly build the new. And I look back in the last 40 years, Microsoft has kind of done that, for example, as a company that’s been around. Maybe not 40 years, 30 years. But that has constantly evolved. You’re seeing that with some of the FAANG companies as well right now. So the speed and your ability to be flexible and change and evolve, because there’s one thing that we do know about tech, it will change.

    Oscar Pulido: Okay so constant evolution is key. Tony, I’m going to end with a rapid-fire round where I’m going to ask you some more personal questions if you’re ready.

    Tony Kim: Sure. Go ahead.

    Oscar Pulido: Okay. So you’re a self-professed podcast nerd, besides The BID, what other podcasts are you listening to right now?

    Tony Kim: You can take away the term “podcast nerd”. I am just a nerd, a geek, whatever you want to say. I was looking at my phone, I think I have 115 podcasts on there right now. I like history, so I listen to “Revisionist History,” Malcolm Gladwell, love that, listening to this thing called “Noble Blood.” And I love these two podcasts, Napoleon Podcast and The Life of Caesar. These are magnus opus, you know, 50, 100 podcasts long, specifics on those guys. I listen to some things in tech, a16z, This Week in Startups, and then maybe a sports one, I listen to this “Transfer Window” on European football and the economics of it, I guess. So, it really varies.

    Oscar Pulido: I think you made it through 10% of your list. If you had to start a podcast, what would it be about?

    Tony Kim: My own podcast, wow! I don’t want to recreate so many great history podcasts that are out there. I mean, I don’t have a PhD in Roman architecture or whatever. I guess I love documentaries and I’m a deconstructionist, so I’d love to maybe do a documentary style episodic series maybe on economic history, like, “What was the spice trade between England and India?” or like, “Who funded the renaissance?” Even maybe mix it with something modern, like to talk about deconstruct like an autonomous car company, what really would that entail?

    Oscar Pulido: So you’re the kind of guy that takes the computer apart to see how it works, which I can assure you is the opposite of what I do. And Tony, speaking of other interests, you’re also a history buff. I understand you own an Enigma machine, which I’ve seen the movie, this was used by the Germans during World War II to transmit coded messages. So how did you acquire one of these and do you actually use it?

    Tony Kim: I don’t have the original German thing, but I did find one that was a kind of modern reinterpretation with some opensource software so you can actually program it. And I did buy it because I think this machine – obviously, the Germans used to encrypt messages, but it was also kind of the spawn of the computer. This is what, as you saw in the movie, when Alan Turing built Christopher to decode this German encryption machine in World War II, which led to basically the dawn of computing. But I did buy it so that I could teach my children maybe the basics of encryption.

    Oscar Pulido: And on that note, what one piece of old technology do you think will make a comeback? I don’t know if it’s the Enigma machine, it feels a little antiquated. Is there something else that comes to mind?

    Tony Kim: Yeah, in general, tech things don’t really come back. I’ll go back to World War II. The British used radar and I think radar is coming back. It’s coming back in self-driving cars. Every Tesla has a bunch of radar and all these cars will have radar in it. And I’ll make another one. This is again, it’s a thing that’s been around: the periodic table of elements. You will continue to see a lot of these rare earths, these exotic materials, composites. It has big impact on kind of some of the extensions of where silicon is going in some of these alternative non-silicon materials. So material science is back. It’s already been back.

    Oscar Pulido: Well, Tony, you’re wealth of information. Thank you so much for joining us today on The BID. It was a pleasure having you.

    Tony Kim: Thank you for having me.