You’ve surely noticed how swiftly computer technology changes. This electronics revolution opens the door to a host of novel investment opportunities.
Come learn how Letko Brosseau can provide you access to this dynamic universe of opportunities.
The seemingly relentless advent of “new and improved” personal computers and various other electronic gadgets is not simply a marketing and profitability ploy. Well-known to those in the tech industries is Moore’s Law (formulated in 1965 by Intel co-founder Gordon Moore), which states that the number of transistors on a computer chip of any given size will double approximately every 24 months. Bell’s Law (originated by American electrical engineer Gordon Bell in 1972), builds on Moore’s Law to stipulate that every decade or so, there will be created computers that are smaller, lower-priced, and therefore more popular.
“What this means is that in the last 50 years, we’ve gone from having room-sized, power-hungry, super expensive computers to now being able to carry much smaller, more powerful, and more affordable computers—in the form of a smartphone—in our pockets at all times,” says Allan Cyril, a mechanical engineering graduate of Montreal’s McGill University who earned his master’s degree in financial economics at HEC. Since 2014, he has served as an expert tech analyst at Letko, Brosseau & Associates. “Every new generation of computers has not only revolutionized society but has impacted business, creating new companies and disrupting others.”
With the smartphone’s existence already being more than a decade old—Apple debuted the iPhone in 2007—the future today belongs to yet another exciting evolution of technology
The Internet of Things (IoT) refers to bringing computer power and connectivity to a range of previously isolated, inanimate objects. Smart security systems or smart speakers like Alexa for the home are obvious examples. But thanks to various sensors that can remotely collect and report back data, this technology extends to industrial and infrastructure applications as well. “For example, civil engineers can discover the real-time condition of a bridge—and its need for servicing and/or repair—from the comfort of their offices, without having to go out into the field and physically inspect it,” says Cyril. “Similarly, no more having to go down to the factory floor to speak to a machine operator to find out why the production line has suddenly stopped.”
Global research and advisory firm Gartner estimates that by 2020 there will be 20.4 billion IoT devices in use globally. Various other sources—including Business Wire, Markets and Markets, and Business Insider—forecast the global automotive IoT market to swell to US$104.2 billion by 2023 (with 90% of all new cars connected by 2040), worldwide healthcare’s IoT share to be worth US$158 billion by 2022, and the value of the smart home IoT industry to be US$58.7 billion by 2020.
Closely aligned to IoT is artificial intelligence (AI), a computer’s ability to perform “thinking” and tasks normally associated with a human being. This “machine learning” is done thanks to the nearly inexhaustible amount of IoT data amassed and analyzed. If you’re a Netflix watcher, you’ve certainly witnessed how the popular streamer suggests movies, TV series, or comedy specials based on your past consumption. That’s AI at work.
Automotive applications of IoT and AI are especially exciting, with your car positioned to become the most sophisticated personal computer in your possession within the next 10 years. “We already have safety features such as automatic braking and adaptive cruise control in high-end cars,” states Cyril. “These may not be fully autonomous yet, but they will be relatively soon. It’s clear to see that with driverless vehicles, we’ll no longer have the need for truck and taxi drivers, which will deeply affect those industries.” Additionally, as concerns over climate change continue to boost the demand for the electrification of automobiles, the need for a host of power semiconductors will spike as well.
“When we talk about semiconductors, we’re talking about integrated circuits—the chips you find when you pull apart an electronic device,” says Cyril. “These serve many functions, such as memory to retain data, or logic to complete operations on those data. There’s a wide gamut of semiconductors that are all essential to our everyday life. It’s a US$360 billion industry that supports the US$3 trillion electronics industry.”
In the realm of IoT, what’s crucial is wireless connectivity through WiFi, Bluetooth (and its equivalent), or cellular networking. When these computers “talk” to one another, there are three stages of communication: a signal travels through an antenna; analog chips condition that signal; and the signal then travels to a logic chip (a connectivity module or baseband modem). As such, with the continuing proliferation of IoT devices the world over, producers of all the various required components should all see increased demand.
When it comes to AI, the task of training machines to “learn” can only be accomplished with massive amounts of accumulated data having to be stored in cloud systems. So companies involved in these technologies should similarly benefit from tremendous growth. In fact, data stored in data centers will grow from just over 20,000 exabytes in 2018 to over 50,000 exabytes in the next two years (EE Times). Imagine that more data will be created in the next two years than throughout all of human history up to this point.
Finally, with an ever-increasing amount of devices to interact with, it is also probable that enterprises with exposure to interface technologies, such as voice or touch screens, will likewise prosper.
An abundance of opportunities clearly exist in the technology space. But while many investors find newer, cutting-edge upstarts attractive despite their overvaluation, we at LBA still feel great enthusiasm for undervalued, heritage companies such as Intel, Qualcomm, and Samsung, which may be perceived by some as “dinosaurs” out-of-touch with the wave of things to come.
“We believe that Intel, for example, is actually well-positioned to introduce new types of chips that are able to deal with increasingly complex technological demands,” says Cyril, “despite everybody pigeonholing it as this old tech company.
Likewise, we remain invested in companies that have exposure to the smart phone market. We’re very cognizant that this sector has been stagnating and is actually slowly declining. Yet we firmly believe that some of these giants of wireless communications have the proficiency to develop essential new technologies, and are therefore well-positioned to pivot into IoT and AI. Some of these corporations are already generating 30% of their revenue from this new space.”
The operative words here are some of these. “You have to find those companies that have this underappreciated exposure to the new world,” concludes Cyril. “You can’t just blindly jump into every one of these ‘dinosaurs’ because some of them will perish. We’re by no means confident that all of them have the potential to pivot profitably. We’ve invested in those that do to create a semiconductor portfolio that benefits from the IoT/AI era without bearing excessive valuation risk.”
Letko Brosseau is committed to its proven investment pillars—fundamental research, price sensitivity, long-term horizons, ESG (Environmental, Social and Governance) integration, international perspective, and investing in public markets. Adhering to these principles has been vital to our firm’s success over the last 30 years. We believe there are many ways to invest and participate in the growth of the technology sector while maintaining our values. Come learn how Letko Brosseau can provide you access to this dynamic universe of opportunities.
This article has been prepared by Letko, Brosseau & Associates Inc. for informational purposes only and is not intended to provide, and should not be relied upon for, accounting, legal or tax advice or investment recommendations. Where the information contained in this document has been obtained or derived from third-party sources, the information is from sources believed to be reliable, but the firm has not independently verified such information. Any opinions or estimates contained herein constitute our judgment as of this date and are subject to change without notice. This article contains certain forward-looking statements which reflect our current expectations or forecasts regarding economic and market conditions. Forward-looking statements are inherently subject to risks, uncertainties and assumptions that are believed to be appropriate in the circumstances which could cause actual events or results to differ materially from those expressed in, or implied by, these forward-looking statements. These statements may also include the expression of opinions that are speculative in nature and should not be relied on as statements of fact.
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