Design by Artis Briedis
For a change to be revolutionary, it has to have a staying power, reach across businesses and have the capacity to change the ways how we work and live. According to Aswath Damodaran, a professor at NYU Stern School of Business, we have lived through 4 such revolutionary disruptions over the last decades:
- personal computer in the 1980s;
- Internet in the 1990s;
- smartphone in the 2000s;
- social media in the 2010s.
You can’t rely on the markets alone to tell us what is going to happen – the markets have predicted 10 of the last 4 disruptions!
These are my three takeaways after watching on YouTube the video of his lecture delivered at CFA Society Uruguay in April 2024:
Lesson #1 – Look For The Effects Of “It”
The architecture and infrastructure companies tend to be the early winners in any disruption if history has taught us anything (take Cisco, for example, for the Internet era). So far NVIDIA has been a clear beneficiary. However, history suggests that architecture companies will have a smaller and smaller percentage of the overall market while other winners will emerge.
For the last decades we have been living in the “winner takes it all” economy. It is still too early to say whether artificial intelligence will follow the same pattern.
Disruptions create not only winners but also losers. To recognise the winners and to avoid the wannabes the “it” proposition is quite helpful. If “it” doesn’t affect expected cash flows or the riskiness of those cash flows then “it” doesn’t affect the value.
Lesson #2 – Don’t Ignore The Fundamentals
Big markets offer the promise of easy scalability. When telling their big market stories companies tend to focus entirely on growth potential and to downplay the fact that the growth will likely have to be shared with other competitors and new market entrants.
The other disconnect from fundamentals comes from companies focusing on growth and on growth only completely ignoring their business model. The scale does not help a broken business model, it rather amplifies the effects of it.
When you have growth (or just a growth potential) as the only basis for pricing the math will have to start working at some point. One hundred companies can’t all have a 20% market share each. This is the moment when prices have to adjust to reality leaving a few winners and many failures. It is often called a bubble bursting.
Lesson #3 – Watch For New Players Joining The Game
Despite the early stages the artificial intelligence, here are some of Aswath’s predictions about its future:
- demand for AI-optimised chips is likely to remain high, but the sector is maturing. While NVIDIA has made 3 successive calls right (with getting into gaming, crypto and AI) and is an extremely good business the growth potential seems to be somewhat limited. Their ability to protect the market share will be determined by how “sticky” their product is;
- artificial intelligence products and services may allow companies to target their customers better (increase revenue) or replace labour-intensive processes (reduce costs) making companies more efficient and profitable;
- big data may finally find its way into the value chain but the process will not be linear and predictable;
- bundling and selling data may provide an opportunity for those exclusive data holders. For example, Amazon has more data about your purchases, interests, likes and dislikes than you probably care to admit (and this is without even getting into what Alexa may know about your household). And Netflix knows your preferences for every movie and every show that you have watched or stopped watching. This data could make them big players in the game.
And, as a final note, – bubbles are not necessarily bad. Bubbles change the way how we work and live. Equity culture simply requires you to accept that bubbles are inevitable and will happen again and again.
For those willing to try and pick top lessons of their own here is a link to the video. You may also want to have a look at Aswath’s latest book “The Corporate Life Cycle: Business, Investment, and Management Implications” (I may be receiving a commission if you decide to purchase it).
* from anything that you are reading, watching or hearing you can realistically expect to remember only a limited number of things. My solution is to pick just 3 items or ideas from any material. This number is non-negotiable. Even the most extraordinary experience gets compressed into 3 things to remember. This approach has worked well for me.
This note was first published on Medium on 18 November 2024.
Aivars Jurcans has more than 20 years of corporate finance and investment banking experience. His services are currently available through Murinus Advisers. More of Aivars’ writings can be found on his page Corporate Financier’s Notes.
