This business, although approaching 100 million subscribers, is still far less profitable than the company’s existing model, but the company’s stock price has nevertheless doubled as investors take the view that Disney will get there – that is, emerge as a credible competitor to Netflix.
Then there are internal combustion engine (ICE) vehicle makers looking to electrify their offerings. Tesla has been the most visible electrical vehicle (EV) champion to date, and it has grown strongly in part because it had no legacy ICE assets.
Volkswagen (VW) in March held a “Power Day” (its answer to Tesla’s annual “Battery Day”) announcing plans to build six battery "giga-factories" with an eventual production capacity of 240GWh per year.
VW also announced plans to spend US$50 billion to build 15 electrical vehicle plants on three continents. It believes it will sell more EVs than Tesla in 2022.
VW has also unveiled a new “unified cell” technology to be launched in 2023 that would by 2030 reduce the battery cost in entry-level cars by up to 50 per cent and by 30 per cent in the volume market segment. Given that batteries are currently about a third of the price of an EV, the VW technology promises to reduce production costs drastically.
So, are Disney and VW examples of value (companies) meeting growth? Our answer is, yes.
But it's not just any growth meeting any value. The value companies fell into disfavour because of their slow progress in this technological world – a world where the pace of change continues to increase. Kodak was a value company that didn't adapt to digital imaging, and paid the price.
Value companies around the world have started to recognise the existential threat of rapid change, and we have seen the first of them adapting (including Disney and VW). No real surprises here. This is a significant opportunity for Loftus Peak investors, so expect to see more on the topic.
This value-meets-growth investment development is, in turn, playing into three big issues shaping returns. All three call into question the accepted wisdom of globalisation – a trend that has lifted living standards around the world (though at different rates, and often with harmful effects on the environment). These three issues are:
1. Trade tensions
The build-up of trade tensions between the US and China spilled over into a semiconductor arms race, following former President Trump's decision to significantly limit the supply of crucial chips to China's Huawei. That decision effectively sidelined the most important company in China.
2. Renewables technology
Expect strong growth in battery demand as car (such as VW) and oil companies are forced to move away from fossil fuels because of environmental concerns.
This, too, is driven by governments (especially those in the EU) as they impose deadlines after which new internal combustion engine vehicles will be effectively banned.
Of course, oil companies are harmed as a result, driving them to dramatically widen their renewables business to compensate. This investment thematic is one that Loftus Peak has incorporated since inception, under the heading “energy as a technology, not a fuel”.
3. Supply chains
Concerns around the global nature of the supply chain for pharmaceuticals and equipment shortages in the wake of COVID-19 have caused countries to question whether there should be more on-shore capacity.
The Loftus Peak investment team has closely followed all the developments raised in this note over recent years, with favourable results for investors.