18th Dec '21 by Edmund Shing

26 comments 2593 reads

Market Musings 18/12/21:
Long-term Tech question marks

Recent podcasts you may care to listen to:

Five facts about Financial Markets in 2021

Recent reports that you may be interested to read:

Equities Focus, December 2021

Is Technology in a Bull or Bear Market?
A Tale of 2 Years - and a Split-Personality Market

There is no doubt that the 10 months following the pandemic market crash in early 2020 were fantastic months for technology stocks, in particular the "hyper-growth" momentum stocks typified by the ARK Innovation ETF and unprofitable tech companies. The ARK Innovation ETF gained an impressive 290% from April 2020 to February 2021, and non-profitable tech companies rose by 387%!

2020: a fantastic year for go-go tech stocks

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Source: BNP Paribas, Bloomberg

Q1:
So, what was the key motor behind this incredible surge in tech stocks in 2020 and in 2021?

Well, I think there were two obvious drivers. First of all, we have, of course, the fundamental driver, which is that we saw an acceleration in adoption of a number of technology drivers in the wake of the pandemic. Key amongst them was the remote working trend. So everyone had to be equipped with computers or laptops, with microphones, with headphones screens.

On top of that, we then had to learn to use video conferencing software like Slack or Microsoft teams. We also had to use collaborative work software, and we just had to learn a new way of working. And all of that was accelerated by the demand for cloud computing, broadband access to the Internet and so on and so forth. So all of these were very bullish trends for both hardware and software tech companies. That's the fundamental part.

On top of that, we've had a huge surge in interest from retail investors, which has led to massive flow of funds by retail investors into both tech stocks and also tech focused funds and ETFs. The Ark Innovation ETF is a classic example of this over this post pandemic period you mentioned, from April 2020 to February 2021, this growth tech-focused ETF attracted $15 billion of retail investor inflows. So the fund went from relatively small to massive in a very short space of time on the back of this trend.

Massive retail investor inflows to the US-listed ARK…

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Doug2b

19th Dec '21

Tech stocks in 2020 formed a classic price bubble. The tangible surplus for such stocks - i.e. the average annual recent year tangible equity growth added to the dividend yield - is typically now between 1% and 2% of the business MCap.
That makes such businesses grossly over priced, a brutal price correction should be expected in time.
Compare that to some of the strongest value pockets within the UK markets, where a tangible surplus of around 10% of MCap is available.

I am not talking about laggard businesses here either, these are businesses that pay out solid dividends and consistently grow their net tangible equity year after year.

AnonymousUser894098

Very interesting article and fully concur that semiconductors will be at the forefront of helping in the next ten years in driving technological innovation but I believe the Metaverse will be a flash in the pan, just another fanciful marketing ploy.
I think the next massive leap in computing and technology will be in the Quantum computing field, which will create the next technological evolutionary step. Companies such as Google and IBM are already making huge investments into quantum research and new start ups like IonQ and Rigetti are also making big progress in the field.

BnB

The META ETF holds the 3 "purest" metaverse stocks - Roblox 9%, Unity Software 5% and Matterport 2% - but it's playing it safe by maintaining plenty of exposure to the mega-caps so as not to diverge too far from the Nasdaq 100. Overall the ETF looks a representative sample of the theme with 3D software and gaming prominent.

I'm not convinced about the scale of the transformation that the metaverse will bring about. But it took only a ten minute look at the Roblox ecosystem and fundamentals to become fascinated. It was the combination of social, educational and commercial possibilities , or rather, alternative realities - those pre-teens are already living, learning, spending and earning big bucks in that space,

raggedtp

20th Dec '21

Interesting comment. Any favourites to look at, please?

LGEN, BWY, FORT, BOOT, ScS, CAML.
Fort needs to be viewed within the context of significant recent year investment in their new brick plant, which begins production in the second half of 2022. Having said that, Fort still currently generates a decent tangible surplus of a little over 7%, but going forward Fort’s tangible surplus is likely to be comfortably into double figures.

Boot is also interesting. Did you know that Boot now has over 90k plots, a similar number to Persimmon, although Persimmon has a MCap c25x larger than Boot. The majority of Boot’s plots are planning promotional agreements (PPA’s), which don’t appear on the balance sheet as they are not owned. Boot get their costs covered plus an additional 15% to 20% of the land sale value once planning is granted. The hidden value in Boot is considerable now.

epo001

I laughed at that. "Yes, I had a quadruple bypass but it was a non-event, in fact I slept through it."

timarr

21st Dec '21

But it took only a ten minute look at the Roblox ecosystem and fundamentals to become fascinated. It was the combination of social, educational and commercial possibilities , or rather, alternative realities - those pre-teens are already living, learning, spending and earning big bucks in that space,

Interesting but quite disturbing article on Roblox in the Guardian today:

Players earn Robux, the in-game currency, by making and playing games – and that currency has real-world value. Roblox shares some of the money that it makes off its players’ creations, but only a small percentage. And the thing is, kids’ creations are the ENTIRETY of Roblox; the company relies on kids to create stuff for other kids. Essentially, the company is profiting off the labour of children.

https://www.theguardian.com/ga...

I haven't read the research this is based on yet but if it's true I think I'd be slightly concerned if I held the stock.

The Guardian, and this writer in particular, has a political and personal stance which blinds it to the manifold positives. The way I see it, Roblox gives pre-teens a platform for and an incredible education in creativity and commerce. That's before you consider the vital social networks that have developed on the site at a time when kids are under lockdown. To parents, it's a godsend, to the kids it's a lifeblood.

Did you know there are ever-increasing numbers of teenage Roblox millionaires? In fact so advanced is the process that some of those young entrepreneurs are now hiring other pre-teens to work on developments for them. Isn't that incredible? So what if the spoils are shared and Roblox takes the bigger slice. Roblox's is the real upfront investment and the young creators and entrepreneurs are feeding off that capital. Everyone wins.

Here's a really good primer from CNBC How indie game makers turned Roblox into a $30 billion company

As to whether it's healthy for kids to become millionaires? Well, that's another question.

The Guardian, and this writer in particular, has a political and personal stance which blinds it to the manifold positives.

As I said, I've not looked at the analysis that this is based on yet. I'll read it and make my own mind up, as should everyone else. The political and personal stance of the publisher and writer aren't relevant to that, as far as I'm concerned.

Of course. And I'm giving mine, which is very much the perspective of an entrepreneur delighted to see talents encouraged at any early age.

It seems Roblox takes 90% of the value of items sold in their marketplace. I'd say that's a proper education in capitalism for any young person.

Nicely put but how else would you suggest a 12 year old monetise their creativity to the tune of $millions?

In your disapproval you’re ignoring the fact that Roblox offers a unique alternative world and unmatched opportunity for youngsters. Indeed it is the only existing metaverse worthy of the description today.

And at what point is a 12 year old capable of giving informed consent to their creations generating tens of millions for Roblox?

I completely, utterly, 100% agree with your general points, but it's hard to see how a 90% take isn't exploitation under these circumstances.

Breakout Trader

22nd Dec '21

rather simplistic to say roblox has a 90% “take”, making it sound like they pocket the lot. It’s quite typical I would say of anti-capitalist sentiments which look at headline numbers and point the finger.

Does the poor developer, whose labour (or is that playtime?) is apparently being exploited, have to pay employees? Overheads? To take on the risk of running a company? To pay App Store fees and continually invest in developing the product? No, they’re all costs and obligations that roblox has to cover.

Perhaps a bit more could go to the developer, but if a few are becoming millionaires through using the platform already it can’t be that bad as it is.

Capitalism is essentially amoralistic. We bring our own moral values to it - or not, depending on taste. Just because a tiny percentage of users become rich says nothing about whether it's good or bad.

However, the underlying business model is clear. Children are encouraged to develop content without being paid which Roblox then monetises very effectively, massively to its own benefit.

Obviously Roblox incurs costs to run its business but the issue here is not whether Roblox has to invest to make its business work, or whether it makes money from doing so, but whether its business is morally acceptable. You may think it is, but based on what I've seen so far, I'm inclined to not.

What’s the difference between roblox making revenue in-game, and Nintendo, sega etc making revenue in the 90’s from selling games consoles and video games to effectively the same target audience?

The method of monetisation is different, but the result is the same - Except in this case the gamers make a bit themselves. I don’t see it as child labour or exploitation when they voluntarily play the game and create the content.

I don’t see it as child labour or exploitation when they voluntarily play the game and create the content.

What you see or not isn't really relevant. What will matter is what the legislators and regulators think when they catch up with the technology.

If someone told me I could work for them for free, made me pay for the privilege, would stand a 1 in 10,000 chance (at best) of making any money, they'd then take over 80% of my earnings and push me to use what was left to buy more stuff from them I'd tell them to sod off. Although not as politely.

But I'm capable of making informed consent. Is a 12 year old? Because if they're not then your "voluntary" is irrelevant.

timarr

Yes, quite, so would I - If it was a job.

What if it was a computer game that you played because you enjoyed it with money as a side issue? Your perspective may be somewhat different.

From what I've seen the developer gets 25% of revenues from their Roblox creation rather than the 10% stated.

That's because you're not looking at it closely. Although frankly even 25% is a disgrace. Even Apple only take 30% and they have genuine costs and overheads not the janky stuff that Roblox offers. But anyway ...

To stand any chance of getting your "game" played at all you have to pay Roblox to advertise it.

If you're lucky enough to sell it at all then you get 70% of the earnings and Roblox get 30%. You're paid in Robux.

To be able to payout from Robux into dollars you need to earn $1,000 minimum. Obviously almost no one does that.

To be able to be payout at all you need to be a premium subscriber paying $5 a month.

When you payout the Robux/dollar conversion rate sees you actually receive only 35% of your earnings.

Unsurprisingly most "earnings" never leave the system and simply circulate around as Roblox takes more and more cuts.

And that's before I get into the gamification. Even experienced Roblox developers admit they only have a rough idea how much they'll earn from any "experience" they generate (note Roblox doesn't have in-game purchases of digital content, they're "experiences" - they need that to get around the Apple App store rules).

As for whether this is "play" or a "job" - well, if no one produced content to "play" then there would be no content for Roblox to monetize. The production of monetizable content for a third-party sounds like work to me.

If this was targeted at adults and they consented to it I'd say they were idiots but fair game to Roblox. But it's not.

timarr

mwjackson

If kids really were making millions (or even tens of thousands) I suspect HMRC might take a different view...

Market Musings 18/12/21: Long-term Tech question marks

Market Musings 18/12/21:
Long-term Tech question marks

Is Technology in a Bull or Bear Market?
A Tale of 2 Years - and a Split-Personality Market

Q1:
So, what was the key motor behind this incredible surge in tech stocks in 2020 and in 2021?

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

26 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 18/12/21: Long-term Tech question marks

Market Musings 18/12/21: Long-term Tech question marks

Is Technology in a Bull or Bear Market?A Tale of 2 Years - and a Split-Personality Market

Q1:So, what was the key motor behind this incredible surge in tech stocks in 2020 and in 2021?

Unlock the rest of this article with a 14 day trial

About the Author

Edmund Shing

26 comments

Unlock the metrics for all these stocks and more...

Unlock the metrics for all these stocks and more...

Market Musings 18/12/21:
Long-term Tech question marks

Is Technology in a Bull or Bear Market?
A Tale of 2 Years - and a Split-Personality Market

Q1:
So, what was the key motor behind this incredible surge in tech stocks in 2020 and in 2021?