Why you shouldn’t forget these big tech stocks

This interview was recorded on Wednesday 16 October 2024.

There would be very few investors that haven’t thought about their tech exposure in the last year. After all, we’ve watched mega-cap tech stocks fuel the US market to record highs and there is little to suggest that the time for these names has passed.

But for those who want alternative options to the Magnificent Seven, emerging market companies are punching above their weight. Just think of TSMC (NASDAQ: TSMC) as one example of a company that firms like Nvidia (NASDAQ: NVDA) are now dependent on. There are other options too in different parts of the supply chain.

The push for digitisation is also simultaneously helping emerging countries develop faster.

John Stavliotis, portfolio manager for Antipodes, sees tremendous opportunities in this space given valuations are cheaper than developed market options.

“Looking at EM growth stocks valuations relative to the broader EM index, the growth stocks trade at about a 35% premium. If we compare that to the Mag Seven, they trade at about a 60% premium to the S&P 500,” he says.

He notes that TSMC is trading on about a 35% discount to Magnificent Seven companies but with a higher growth rate.

In this episode of The Pitch, Stavliotis discusses how emerging markets are capitalising off the digitisation trend and two of the companies he invests in.

Edited transcript

Digitisation is one of the major megatrends of our time. How are emerging markets capitalising on this trend and what drivers are pushing for growth in these markets?

It is a really interesting topic, especially in EM because a lot of this digitisation is helping these countries develop faster. It’s a really interesting area where a lot of capital is being invested and there’s real support from governments and industry to get progress. When I think of digitisation in EM, I’ll put it into three buckets to explain different opportunities.

The first one is the digitisation of consumer services. In EM, we’re seeing a lot of progress here and what I’m referring to here is things like e-commerce, financial digitisation through digital banks for example. Why the adoption has been so great is in many of these countries, you’ve gone from a traditional, old-school way of doing things straight to world-class digital offerings. We’ve seen that, for example, in China, in most of South East Asia with e-Commerce, with deliveries. Digital banks, for example, Nubank (NYSE: NU) in Latin America, have been able to grow very fast because of that, straight from traditional to digital.

The second bucket is B2B or business services. Emerging markets have lagged here as most of the solutions are driven by the global mega-cap companies that focus on the United States and other developed markets. In China, we're starting to see some local companies focus on tech solutions for their local companies, and AI is going to progress this penetration in the coming years.

The third bucket is the tech supply chain opportunity. In emerging markets, we are seeing that Korea, Taiwan, and to a lesser extent, China have really cemented themselves in that supply chain and these companies here are the enablers for AI and tech development in the rest of the world.

How do you see the opportunity for Asian emerging market companies in terms of a role in tech supply solutions and is this changing?

As I mentioned, Taiwan and Korea are cemented in that supply chain, and it's not by chance.

If you look at TSMC (NASDAQ: TSM) for example, they effectively have a monopoly on leading-edge semiconductor manufacturing for high-performance computers. And even in broader semiconductor manufacturing, they continue to take share. They now produce 55% of all chips produced globally, and that's because they're the most efficient and they continue to lead as new technologies emerge. So, we don't see a risk to their area.

There is one change happening though with geopolitics as everyone would know, with China being cut out from buying or manufacturing leading-edge chips. One of the policies out of the US, which is called the Foreign Direct Products Rule, basically gives the US the ability to stop foreign entities from selling products they produce in another country to China or any other country.

If that technology or software has been developed by the US, this means that China will be very serious about developing its capability in semiconductors and tech supply chains. And we've seen an enormous amount of capital being thrown at this area, and they have had some very strong results in the last few years progressing in their ability to design chips and semiconductors.

One of the companies we invest in makes semiconductor equipment to make semiconductors in China called Naura Technology (SHE: 002371), and they're continuing to challenge the global equipment makers selling to Chinese companies at the moment. So that's an attractive opportunity that has strong support from the government.

How do evaluations of emerging market tech firms compare with companies like the Magnificent Seven?

Looking at emerging market tech companies versus the Mag Seven would not be a fair comparison given the quality of the Mag Seven. But a way to discuss valuation I think is looking at EM growth stocks valuation relative to the broader EM index, the growth stocks trade at about a 35% premium. If we compare that to the Mag Seven, they trade at about a 60% premium to the S&P 500. So, you can see that in EM, the growth premium is half what it is in the Western world.

One other example I'd give is looking at TSMC specifically. The TSMC driver of demand is the same driver of demand for the Magnificent Seven or the majority of those companies. 

The growth rate of TSMC is about 70% faster than the average of the Mag Seven, 25% versus about 15%, and it's currently trading on about a 35% discount to those companies. So, you're getting a high-quality business, the same demand driver, faster growth, and a bigger discount.

Can you discuss some of the companies you invest in your portfolio and why you selected them?

We've talked about a few of the tech hardware names so I might talk about a Brazilian company to sort of go to the other side of the world.

Nubank is a fully digital bank that launched in Brazil. They have added 60 million customers in the last four years, and they now have 40% of Brazilians as customers. So how are they able to do that through their technology solutions and technology? They were able to offer a far better customer service proposition than the incumbent banks. That customer service issue is common around the world, but they have been able to crack that service proposition. The technology has also meant that they've got no branches and very much fewer staff. They've got industry-leading cost-to-income ratios that allow them to bank the poorer customers and still generate an industry-leading return on equity.

What that means is if you can get a customer when they're quite young or still quite poor and they create wealth over time, this bank can grow with them, start lending to them and help them in their journey. That will provide growth to them in Brazil. They're taking this model to Mexico, and we think they'll take it to broader Latin America over time. 

If we look at the valuation of this company, they've traded on the same P/E as Commonwealth Bank (ASX: CBA) in Australia. Their return-on-equity is two times as high, and their growth rate is a staggering 25 times the rate of growth of CBA. This is a really interesting opportunity where you are getting exposure to digitisation in Brazil, but you're getting it at a very attractive valuation.

Another interesting one is Didi (NASDAQ: DIDI), which most people would know now is in Australia trying to compete with Uber in on-demand transportation. Didi is the Uber of China.

An interesting fact here is that they got removed from the App Store in China due to a regulation issue a couple of years ago, and their market share went from 80% to 75% over that period. They've got an extreme lock on the customers in China, and they continued to grow rides even through this period at about 15 to 20%, which is a very attractive growth profile given the weakening economy.

They've also got exposure to Latin America and select countries like Australia where they're offering a cheaper solution. This company is now getting into profitability. We expect them to earn closer to 5% of GMV profits in the next two to three years, which is half the rate of what Uber (NASDAQ: UBER) makes. At that point of profitability, the company is trading at single-digit EBITDA multiples, which is very attractive given that growth profile.

We expect them to continue to grow in China, but also growing Latin America where they have got equal share with Uber at this point, but are disrupting that market. So, another sort of digitisation, this time in transportation opportunity, again, trading quite cheap relative to global peers.

Access a portfolio of companies exposed to emerging markets 

For more information on the Antipodes Emerging Markets fund, including where John is finding the most attractive opportunities today, please visit the Antipodes website or fund profile below. 

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