This week’s TAMIM reading list covers a diverse range of topics, from the rapid evolution of the EV industry to the financial risks of excessive leverage during market rallies. We explore the surprising psychological struggles of wealthy “tightwads,” the expanding health benefits of GLP-1 drugs like Ozempic, and the powerful networks shaping political landscapes. Additionally, you’ll find insights on essential investment strategies, the U.S. drone race, and the geek takeover of the Paris Olympics. Each article offers valuable perspectives on the forces driving change in our world today.
Welcome to this week’s carefully curated reading list, where we’ve mixed in a bit of everything to keep your mind sharp and entertained. From the Washington Post’s guide on keeping your data safe in a world that’s constantly trying to snatch it away, to Vox’s exposé on the oil industry’s dubious climate “solutions,” we’ve got your intellectual appetite covered. Ever wondered what happens when pallets disappear in the supply chain? The Wall Street Journal has the scoop with the ‘Pallet Detectives.’ Silicon Valley’s latest gamble on AI, PowerPoint’s unexpected rise in social circles, and Exxon’s near-miss with a trillion-dollar oil discovery are all here to spice up your reading. And for those who think the best ideas come while walking, HBR confirms it. Plus, don’t miss the BBC’s visual guide to the Olympics – a feast for your eyes. Dive in and enjoy the ride!
📚 Our data isn’t safe. Resist giving it up whenever you can(Washington Post)
📚 Oil companies sold the public on a fake climate solution — and swindled taxpayers out of billions (Vox)
📚 When This Supply-Chain Essential Goes Missing, It’s Time to Bring in the ‘Pallet Detectives’ (The Wall Street Journal)
📚 Silicon Valley’s Trillion-Dollar Leap of Faith (The Atlantic)
📚 Exxon Almost Walked Away From Its $1 Trillion Oil Discovery (Bloomberg)
As we stand on the brink of a new era, the wave of artificial intelligence (AI) investment is just beginning.
This transformative technology promises to revolutionise industries, reshape economies, and redefine the boundaries of human potential. For investors, the burgeoning AI landscape presents an unparalleled opportunity to capitalise on the next phase of innovation, much like the creation of the automobile and the internet before it.
Below we explore the major themes of this technological revolution, focusing on what we believe are the three overlapping sectors that unite around AI: Technology, Energy and Money.
Technology: The Backbone of AI Innovation
AI is only at the beginning of its journey, and we foresee four broad stages that will unfold as technology, energy, and money support growth and innovation.
Phase 1: Model Training
The initial phase of AI involves developing robust models capable of learning from vast amounts of data. This stage is exemplified by models like ChatGPT, which transform quality data into actionable intelligence. The rapid adoption of ChatGPT underscores the potential of AI; it reached 1 million users in just five days, a feat that took Netflix (NASDAQ: NFLX) 3.5 years to achieve. The focus in this phase is on creating foundational AI models that can process and learn from diverse data sets.
Phase 2: Edge Devices and Data Utilisation
In the second phase, significant advancements are made as major players like Apple (NASDAQ: AAPL) leverage AI, such as it’s planned Apple Intelligence, to gain a competitive edge through data and edge devices. This stage involves integrating AI into everyday devices, such as smartphones and wearables, to enhance their functionality. AI enables these devices to offer personalised experiences, process data in real-time, and improve efficiency. The synergy between AI and edge devices marks a critical step in making AI ubiquitous in consumer technology.
Phase 3: Application Proliferation
The third phase sees the widespread proliferation of AI applications and software across various industries. AI-driven solutions will become integral to business operations, healthcare, finance, and more. This stage focuses on developing specialised AI applications that cater to specific industry needs. The advancements in AI software will lead to more intelligent systems capable of performing complex tasks, automating processes, and providing insights that drive decision-making.
Phase 4: Tangible Innovations
In the final phase, AI will bring about tangible innovations such as robots, self-driving cars, and other autonomous systems. This stage represents the culmination of AI development, where the technology is fully integrated into society, transforming how we live and work. The deployment of autonomous systems will revolutionise industries by increasing productivity, enhancing safety, and reducing operational costs. AI’s impact will be felt across all sectors, driving significant economic and societal changes.
The Role of Semiconductors and Hardware Supply Chain
Semiconductors are the essential building blocks that enable AI to function, much like how the internet and cloud computing laid the groundwork for today’s digital world. The hardware supply chain for semiconductors, including the production of wafers, cables, sensors, and processing power, is critical for creating these four phases of AI development. As AI technology advances, the demand for high-performance semiconductors and other hardware components will surge, driving growth within the semiconductor industry.
Companies that specialise in these foundational technologies will play a pivotal role in supporting the AI revolution, ensuring that the necessary infrastructure is in place to sustain AI’s rapid development.
Energy: Powering the AI Revolution
The energy sector is both a beneficiary and a driver of AI innovation. AI technologies are optimising energy production, distribution, and consumption, leading to more efficient and sustainable practices. Nation-states increasingly recognise the importance of energy independence as a national security priority.
This surge in energy demand presents numerous opportunities in the build-out of electrical infrastructure. The adoption of electric vehicles (EVs), the expansion of data centres, and the growth of cryptocurrency mining are all contributing to this increased energy consumption.
Additionally, AI is revolutionising energy management through smart grids and data analytics, enhancing efficiency, reducing outages, and lowering costs for businesses and households.
Surge in Infrastructure Needs
As AI advances, the infrastructure required to support its power demands is surging. The proliferation of AI applications is driving a significant increase in electricity consumption, necessitating substantial upgrades to the electrical grid. This includes the construction of new power plants, the expansion of transmission networks, and the modernisation of existing infrastructure to handle higher loads and improve resilience. The rise of AI-driven industries such as data centres and EVs requires robust and reliable power sources. This growth in infrastructure development presents numerous investment opportunities in sectors related to power generation, grid management, and energy storage.
Optimising Renewable Energy Sources
The integration of AI in renewable energy sources like solar and wind is enhancing their efficiency and reliability. AI algorithms can better predict weather patterns and optimise the operation of renewable energy plants, ensuring maximum energy production. This not only makes renewable energy more viable but also supports global efforts to combat climate change. AI is being used to improve battery performance, predict maintenance needs, and extend the lifespan of energy storage systems. This is essential for ensuring a stable and reliable energy supply, particularly as the world transitions to more sustainable energy sources.
Smart Grids and Energy Management Systems
Smart grids, powered by AI, represent a significant advancement in energy distribution. These grids use real-time data analytics to balance supply and demand, prevent outages, and optimise the flow of electricity. This technology enables utilities to respond quickly to changes in energy consumption patterns and integrate renewable energy sources more effectively. For businesses and households, AI-driven energy management systems provide insights into energy usage, helping to identify areas for improvement, reduce waste, and lower costs.
Money: The Fuel for AI Growth
Investment in AI is crucial for its continued development and adoption. Financing this technology is expensive, and sovereign governments are increasingly providing the necessary financial resources. The United States, with its position as the global reserve currency, is in a powerful position to lead this investment. However, this dominance is being challenged by the BRICS nations (Brazil, Russia, India, China, and South Africa) and the increasing importance of gold.
AI is not just a technological advancement; it is a security issue. As such, AI will not be a luxury but a necessity. Governments recognise this and are ramping up their investments in AI research and development to maintain national security and competitive advantage. Public funding is being directed towards building the necessary infrastructure, such as data centres and high-performance computing facilities, which are essential for AI development. Additionally, governments are establishing frameworks and regulations to guide the ethical use of AI, ensuring that its deployment benefits society as a whole.
To hedge against financial uncertainties, traditional safe havens like gold and emerging assets like Bitcoin and other derivatives are being considered. These alternatives potentially provide a buffer against inflation and economic instability. Money is a critical component that pertains to all pillars of power, and they are all intricately interconnected. The strategic allocation of financial resources will determine the pace and direction of AI advancements.
This convergence of financial support will help overcome the substantial costs associated with AI development and ensure its integration into various aspects of society, ultimately fueling growth and technological progress.
The TAMIM Takeaway
The wave of AI investment is just beginning, and the opportunities it presents are vast and varied. It’s important to comprehend that AI and the opportunities surrounding it are still in their early stages. Patience is required, as the journey towards realising AI’s full potential will take time. While current big names in the industry may seem dominant, the future winners could very well be emerging companies that are not widely known today.
Investors should remain open-minded and vigilant, seeking out an understanding of less prominent smaller and mid-size players that are poised to become the next leaders in AI. By embracing the long-term view and understanding that the landscape will continue to evolve, investors can ride this wave of AI investment towards a future of unprecedented possibilities.
The market continues to present opportunities for the strategic investor ahead of the upcoming earnings season.
Amidst recent volatility, the small-cap space remains a fertile ground for potential, as demonstrated by the latest developments in the TAMIM Australian Equity portfolios. Below are three companies held with an update on recent developments.
Viva Leisure Expands with Key Acquisitions and Membership Growth
Viva Leisure Limited (ASX: VVA), a leading provider of health and fitness clubs across Australia, has announced the early completion of three Western Australian acquisitions, marking a significant milestone in the company’s expansion strategy. Originally scheduled to finalise by the end of August 2024, these early completions will provide an additional month of contribution to the FY2025 results.
With these acquisitions, Viva Leisure introduces its Club Lime brand to its sixth State/Territory, further solidifying its position as Australia’s largest non-franchised health club brand. The acquisitions, totaling $15.7 million, include eight locations with approximately 20,000 members. These additions are expected to contribute over $3.9 million in EBITDA annually, with forecasted synergies of $1.0 million from FY2026.
CEO and Managing Director, Harry Konstantinou highlighted the company’s success, stating, “Our recent achievements mark a significant milestone for Viva Leisure. Surpassing the upper end of our revenue guidance for FY2024 underscores our relentless pursuit of excellence and growth.”
In addition to acquisitions, Viva Leisure has seen robust membership growth. Corporate memberships have exceeded 210,000, marking a 15% increase since June 2023. Network memberships have also grown to over 385,000, reflecting a 12% increase. The company now operates 180 corporate locations and 356 network locations, further establishing its market presence.
The company’s strategic refurbishment program, announced in August 2023, has also been completed successfully, with 27 locations undergoing enhancements. Plus Fitness, one of Viva’s brands, continues to break records, securing 21 new locations in FY2024 and surpassing 200 operating locations globally.
Looking ahead, Viva Leisure is poised for continued success with a strong pipeline of greenfield locations and ongoing acquisition strategies. More importantly management noted they are on track for the upper end of guidance achieved for Q4 and FY2024 revenue. The company’s full-year results for FY2024 will be released on 14 August 2024, promising a comprehensive update on these significant achievements.
Bravura Solutions: Proposed Return of Capital and Updated Guidance
Bravura Solutions (ASX: BVS) has announced a proposed return of capital to shareholders.
Contingent on receiving the necessary approvals from shareholders at the upcoming Annual General Meeting (AGM) and securing a favourable Class Ruling from the Australian Taxation Office (ATO) the company intends to distribute up to $75.3 million or 16.7 cents per share. This decision follows a thorough review of Bravura’s capital management strategy, following on from the previous management’s decision to raise capital in March 2023 and the significant transformation executed during FY24. The board has determined that the business is overcapitalised and aims to return excess capital to its shareholders within three months of the AGM, pending the requisite approvals.
This follows on from the July market update where Bravura announced an upgrade to its FY24 financial guidance.
The unaudited operating earnings guidance has been increased to approximately $25 million, up from the previously forecasted range of $18 million to $22 million. Additionally, Cash operating earnings guidance stands at around $10 million. CEO Andrew Russell attributed this upgrade to the successful execution of Bravura’s transformation strategy, which has stabilised the business and surpassed budget expectations.
We have previously discussed how we believe Bravura is a turnaround story and with the company’s proactive capital management and upgraded financial guidance position the business continues to show signs of this being the case.
Dropsuite’s Strong Q2 FY24 Results
Dropsuite Limited (ASX: DSE) reported its Q2 FY24 update displaying an encouraging set of results.
The company showcased significant growth across several key performance indicators. We’ve previously written about how Dropsuite is approaching an inflection point and the company continues to focus on expanding its market presence and enhancing its product offerings. As a result, the Q2 numbers have yielded impressive outcomes, particularly in Annual Recurring Revenue (ARR), the number of paid users and churn rate.
One of the standout metrics from Dropsuite’s Q2 FY24 report is the remarkable growth in ARR.
The company reported an ARR of AUD 39.92 million, representing a 31% year-over-year increase. This substantial growth confirms Dropsuite’s ability to attract and retain customers through its comprehensive suite of cloud-based backup and archiving solutions. The ARR growth is a testament to the company’s successful execution of its strategic initiatives and further solidifies our thesis that the company can scale its business and expand its customer base via its partner ecosystem.
During Q2 FY24 the company brought its churn rate back down to below 3%, consistent with its historical performance.
This follows on from an increase in the March quarter to just under 5%. Dropsuite previously reported that the increase was primarily due to increased competition on pricing especially in the Europe, Middle East, and Africa (EMEA) region. It was noted last quarter that the company had been introducing the necessary measures to address and mitigate churn going forward which appear at this stage to be working.
Dropsuite has seen a significant increase in its paid user base.
The number of paid users grew by a record 112k during the quarter to reach a total count of 1.35 million. This growth is indicative of the strong demand for Dropsuite’s solutions and the company’s ability to penetrate new markets. The expanding user base is a critical driver of Dropsuite’s recurring revenue model, providing a stable and predictable income stream.
Dropsuite CEO Charif Elansari commented:
“Continued growth in the global data protection market, combined with our leading position and customer-centric approach, drove record seat additions in Q2 2024. This momentum, along with continued expansion of our MSP partnerships, fuels our optimism for future growth. Furthermore, churn returned to its historical level of <3% after a slight uptick in the March quarter. This reflects our strong commitment to client service and support across the organisation. With a robust balance sheet, favourable market tailwinds including data security and regulation, and a highly scalable distribution channel, we are well positioned to deliver growing and sustainable returns to our shareholders.”
Dropsuite’s Q2 FY24 results reflect the company’s impressive business model and its ability to execute its growth strategies effectively. The significant increases in ARR and paid users demonstrate Dropsuite’s strong market position and its potential for continued success.
The TAMIM Takeaway
The market continues to present opportunities for the strategic investor ahead of a flurry of earnings reports expected over the next month.
Despite recent volatility, we believe there are still a number of opportunities in the small-cap space that remain ripe with potential, as evidenced by the three companies highlighted above. Strong results, capital returns, upgraded guidance, and ongoing merger and acquisition activity underscore the abundant opportunities available.
The proactive management and growth potential within the current market reinforced our confidence in the long-term value that can be delivered to ASX investors.
Disclaimer:Dropsuite Limited (ASX: DSE), Bravura Solutions (ASX: BVS) and Viva Leisure Limited (ASX: VVA) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
Would you bet your retirement on predicting the daily weather forecast over the next five years? Just as that gamble would be absurd, so too would be the attempt to perfectly time the stock market.
Negative stories and the allure of market timing can be persuasive, often suggesting that a bubble is forming and a crash is imminent. Gloom seems to be what sells these days. After all, “If it bleeds, it leads” has been said in newsrooms across the world for a hundred years. When it comes to the world of economics and investing, negative opinions also get more attention. Focusing on the potential risks and things that could go wrong seems to add to one’s credibility.
In contrast, those with a glass half-full view can be mistaken for being overly relaxed. After all, could they really have done enough research if they hadn’t unearthed a looming crisis?
However, when it comes to investing, being an optimist pays off. Indeed, over the past 20 years, there have been sharp pullbacks, but the S&P 500 is up over 500% and the NASDAQ 1000% in that period.
It’s easy to see how investors could have been convinced to sell everything in 2019 or during the turmoil of early 2020. However, those who did missed the fastest market rebound of all time and a subsequent remarkable bull run, leaving them with cash on the sidelines. Sitting in cash waiting for another crash hasn’t been fruitful either – inflation has eaten away at your purchasing power while you tried to time the market.
To achieve long-term success, investors need to recognise the illusion of pessimism and avoid poor market timing behaviours.
Bear Markets are Shorter, Bull Markets are Longer
Historically, bear markets tend to be shorter and less frequent than bull markets. The S&P 500 index has delivered an annual return of greater than 10% over the past 30 years, including reinvested dividends. If you ha’d invested $100,000 in 1994 and left it alone, it would have grown more than 20-fold, surpassing $2,000,000. Australian shares have delivered close to the same, just over 9% annually, and even the smaller New Zealand market has returned 8.5% annually over that period.
Source: Vanguard
Consider the myriad challenges the world has faced during that time: the September 11 terrorist attacks, numerous wars, a US housing crash, a global pandemic, and multiple recessions in the US and parts of Europe. There have been at least 14 occasions where the S&P 500 fell by more than 10%, including four instances where it dropped over 20%. Twice, the market was cut nearly in half. Despite these significant setbacks, those who stayed invested reaped substantial long-term rewards.
According to Invesco, using data from 1968 to 2020, the average length of a bear market was 349 days, while the average bull market lasted 1,764 days. Research indicates that over the last 92 years, markets have been rising 78% of the time, with only about 20 years spent in bear markets. This historical perspective underscores the importance of staying invested and maintaining a long-term optimistic outlook.
The belief that things will get better, mixed with the reality that the journey will include setbacks, disappointments, surprises, and shocks, is a fundamental principle of investing. Embracing this mindset helps investors avoid the pitfalls of market timing and focus on the sustained growth that historically always follows bear markets.
The Pessimism Bias in News and Investing
Negative news tends to dominate headlines, significantly impacting investor sentiment. Studies have shown that bad news is more likely to be reported and shared, a phenomenon known as the “negativity bias.” This bias can lead investors to make poor decisions based on fear rather than facts.
Famous bearish predictions, such as those forecasting extensive market crashes in the wake of events like the Ukraine war or a follow-on from the COVID-19 pandemic, often do not materialise. Even more pertinent is the fact that, beyond the relatively short and painful period of corrections and bear markets, bulls take over and drive markets to new all-time highs.
Investors who reacted to these dire predictions frequently miss out on subsequent market rallies. In late 2022, headlines were that rising interest rates would be the death of technology and growth. The technology-focused mega-cap leaders dubbed the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla), climbed 75.71% as a collective during 2023.
“Pessimists sound smart, optimists make money.”
– Nat Friedman
By focusing on the long-term potential rather than short-term volatility, optimists are better positioned to benefit from the market’s inherent upward trajectory.
There is a lot of hype around AI, and it is understandable why some investors might think it’s best to “wait for a crash” before diving in. The market concentration in the top five stocks of the S&P 500—Apple, Microsoft, Amazon, Nvidia, and Alphabet—could easily fool anyone into believing the entire market is overvalued. However, this perspective overlooks the broader opportunities available within the AI sector.
The AI market is projected to grow at a compound annual growth rate (CAGR) of 37% through 2030, according to data from Grand View Research. Last year, the industry reached nearly US$200 billion, and this trajectory suggests it could achieve close to US$2 trillion by the end of the decade.
“Over time, AI will be the biggest technological shift we see in our lifetimes. It’s bigger than the shift from desktop computing to mobile, and it may be bigger than the internet itself. It’s a fundamental rewiring of technology and an incredible accelerant of human ingenuity.”
– Sundar Pichai (CEO of Google)
The AI value chain is extensive, encompassing everything from semiconductor manufacturing to cloud computing infrastructure. Companies involved in producing the essential components for AI, such as wafers, cables, sensors, and processing power, stand to benefit significantly. Additionally, the demand for AI applications necessitates energy infrastructure, robust data storage and cloud computing solutions, creating opportunities for companies in these sectors.
We never suggest investors blindly throw money into the market, nor do we think index investing is the best method for compounding wealth. However, we do know that the next phase of technological invention and innovation is really in its early days and attempting to perfectly time market entries and exits can lead to missed opportunities.
While large-cap stocks get most of the attention and some valuations may seem extended, there is a vast sea of opportunities in small and mid-cap companies. These smaller firms often fly under the radar but are poised to benefit from decades of growth in AI technology and energy innovation. By focusing on these areas, investors can position themselves to capitalise on the transformative potential of AI while avoiding the pitfalls of market timing.
The Classic Rules of Investing
Long-term investing has consistently proven to be beneficial. Historical performance data shows that despite periodic downturns, markets generally trend upwards over time. Common fears about staying invested during market downturns often lead to poor decision-making. Investors might be tempted to sell their holdings during a dip, but this approach frequently results in missing out on subsequent recoveries.
Two fundamental aspects are crucial for the long-term stock market investor. On the one hand, you have to trust that things will continue to improve in the long run.
The stock market is not the right place for pessimists.
One must have almost unshakeable confidence that the economy and quality of life will continue to improve over time. On the other hand, you have to be realistic. Conditions will not improve every day, every month, or every year. The path will rather be strewn with pitfalls.
Forecasts are often useless because most of the time, they are wrong.
There is no point in trying to predict what is coming; instead, we must prepare for any eventuality that could arise at any time. Saving like a pessimist allows for freedom and security when inevitable drawdowns occur. These are opportune moments to invest rather than run for the hills.
Additionally, with the beginning of a new era of technology and innovation, there is great cause for optimism when you take a long-term view. By maintaining this balanced perspective, investors can navigate market fluctuations and capitalise on the enduring growth opportunities the market offers.
Disclaimer:Alphabet (NASDAQ: GOOG), Amazon (NASDAQ: AMZN), Microsoft (NASDAQ: MSFT) and Tesla (NASDAQ: TSLA) are held in TAMIM Portfolios as at date of article publication. Holdings can change substantially at any given time.
Viva Leisure Limited (ASX: VVA), a leading provider of health and fitness clubs across Australia, has announced the early completion of three Western Australian acquisitions, marking a significant milestone in the company’s expansion strategy. Originally scheduled to finalise by the end of August 2024, these early completions will provide an additional month of contribution to the FY2025 results.
Bravura Solutions (ASX: BVS) has announced a proposed return of capital to shareholders.
Dropsuite Limited (ASX: DSE) reported its Q2 FY24 update displaying an encouraging set of results.
