Intermede Investment Partners talk disruption in global tech

Funds Management

by Jessica Amir

Intermede Investment Partners Investment Analyst, James Kim talks about why tech firms are becoming so influential and how investors are responding to this rise in dominance.

Jessica Amir: Hello. I’m Jessica Amir for the Finance News Network with Intermede Investment Partners Investment Analyst James Kim. James, thanks for coming to Sydney.

James Kim: It’s great to be here.

Jessica Amir: You’re based in Silicon Valley with your finger on the pulse of tech stocks, which have seen a massive rise across global markets. So why are these firms such major influences and so dominant?

James Kim: I think the answer to that really lies at the heart of the uniqueness of the business models that we see in technology today. So, typically we’re talking about companies that are Internet-enabled digital businesses that operate in the business of selling digital goods in some form. Because these digital goods have almost zero marginal cost, they lend themselves to having very powerful network effects. The concept of network effects means businesses that have products or services that become more valuable, the more people that use them.

So, for example, in the case of social networking, we have Facebook. For every individual that joins Facebook that reaches out and connects to their friends and associates online, that actually increases the value of the platform itself, so that Facebook continues to grow and attract users because of the scale that it has already achieved. These types of network effects allow businesses and industries to achieve increasing returns to scale. What that means is that as the companies’ businesses get larger and larger, they attract more and more users, which then leads to increased market share and increased profitability.

This type of flywheel effect creates industries that are very difficult to compete against, because you don’t have the same scale that can match a firm like Facebook already has. You can see the same phenomenon in other Internet-enabled businesses today. So that includes Google (Alphabet, NASDAQ:GOOG), Amazon Inc. (NASDAQ:AMZN), Alibaba Group (NYSE:BABA). All enjoying some level of network effect that leads to winner-take-all dynamics with each of these businesses dominating their particular niche of the Internet world.

Jessica Amir: And, James, how are investors responding to this massive rise of disruption?

James Kim: We believe investors face a very daunting task in today’s market. As you’ve mentioned, given the growth of these technology-enabled businesses and a rise in stock prices over the last few years, we believe that valuations have become somewhat stretched, given the optimism around the success of these businesses going forward. I think that creates some risks for investors as we look forward because investors still have to find opportunities to capture upside return, or the ability for share prices to continue to rise from the already high levels today.

But the second challenge that investors face is that when we look at other sectors that are surrounding technology, each of these other businesses have been disrupted in some form by the new digital revolution, which has made competitive dynamics in any given space more challenging as things continually evolve and change. In this kind of environment, we think it’s important for investors to remain focused on sustainable, competitive advantage, which means finding those industries and companies where investors can find companies that can really create value in a sustained way, which means creating a willingness to pay that far exceeds the cost to deliver that service or good, and that moat can be protected through time. If investors stay focused on identifying those types of businesses, I think they will be well served to create outsized returns going into the future.

Jessica Amir: Speaking about outsized returns, what new stocks have you added to the portfolio that you’re really excited about?

James Kim: One of the stocks that we’re very excited to own and has been added to the portfolio recently is a company called Grupo Televisa (NYSE:TV), which is the largest media conglomerate located in Mexico. Televisa owns several very important assets. Number one, it is the largest TV broadcaster in the country, it is the largest producer of Spanish language television content globally. Number two, it owns the leading distribution assets in the country as well for pay television, which means both on the satellite side as well as the cable network side. And lastly, tied in with the pay TV networks, it is the leading provider of broadband Internet to the Mexican population. So, because of its ownership of the last-mile connection from the network to the home, it also is in the business of providing that connectivity for broadband Internet.

We believe that we’re in a world that’s being disrupted from all different angles, especially on the media side, where we see the growth of companies like Netflix (NASDAQ:NFLX), which have really disrupted how we consume and view content. But in the end, we still believe that the ability to create interesting, unique content that attracts viewers to your platform or to the program will remain valuable no matter what distribution platform becomes the dominant one. So we believe companies like Televisa, which really have the dominant market share for producing great quality video content, will remain valuable even into the future. And that’s why we’re excited to own shares in their name.

Jessica Amir: Brilliant. James Kim, thank you so much for your insights.

James Kim: Thank you.


Ends

Jessica Amir

Finance News Network
Jessica joined FNN in January 2017 with a passion for equities and funds management. As Head of News, she has been a broadcast journalist for over seven years, specialising in finance. She has been a journalist with Sky News Business, ABC 1, ABC's The Business and ABC24. She’s also worked as a TV reporter for regional Channel 7 and 9. She also previously worked as a financial planner and real estate agent.