The Emergence of the Large Cap Paradigm [Part 1]
Posted November 16, 2020
My analysts Richard Vigilante and Steve Waite have written this four-part series for readers of Gilder’s Daily Prophecy.
If you missed the intro I gave on my stellar team, go here to catch up.
Keep scrolling to read part 1…
At The George Gilder Report, the two of us cover mid-to-large cap tech stocks. We love it. But we have to admit that among cutting edge tech guys, large caps can lack a certain cool.
Say “large-cap” to techies living on the edge and there is a good chance you will be greeted with a rather stagey yawn.
We’ve always thought this was unfair. Is Apple not cool? Is Amazon’s robot army not cutting edge? Does its mighty drone air force not strike fear in the hearts of its enemies as it crests the horizon in mystic silence, ready to strike?
OK, so they are cool. Still as investment propositions aren’t a lot the large caps of yester-year just a bit tired?
Our large cap portfolio currently contains only 18 companies. Of these, nine had a trading price on Jan 2, 1998, just before the tech bubble began to inflate.
From that date to this the S&P 500 is up some 270%.
Our nine pre-millennium companies are up an average of more than 2,700%, ten times the S&P.
Six are up 1,200% or more. Most of that growth came years ago.
Is there any juice left in those oranges? Is there any undiscovered value left in these very well-known companies?
Actually, we see these geezers and several more like them as the stocks of the future, the next big things. Investors will make more money with the geriatric set in the next 10 years than in the past 10.
It may seem incredible to say that Qualcomm, or Taiwan Semiconductor, or Texas Instruments, (or even still-mid-cap but 20-year-old Infinera) are once again among the hottest investment properties around, but they are.
This is not an accident or a fluke. It is the product of a paradigm, of the evolving nature of demand, in both the Microcosm and the Telecosm and of the fundamental physical challenges of meeting that demand.
Once upon a time perhaps, large cap was all about the M&A and the ROA and the brand power.
Today, large cap tech is all about the physics.
It’s true that much innovation, especially of the Zero to One sort, happens in small companies. That’s why we follow small companies so closely in George Gilder’s Moonshots.
That’s why we are considering (we will decide early next year) launching a new exclusive service uncovering for our investors the most promising pre-IPO tech firms.
Yet at this moment in history, certain crucial and extraordinarily profitable innovations can come only from tech firms that already dominate — not just lead, but dominate — their fields.
Our great friend and colleague, the late Clay Christensen, was famous for his “disruptive innovation” paradigm. Disruptive innovation was super-sexy. It explained the mystery of how an apparently inferior, cheaper technology suddenly triumphed over an apparently superior technology. (A favorite example was the triumph of the humble PC over the powerful mini-computer. Who remembers DEC?)
Everybody loves disruptive innovation. It’s the triumph of the underdog, the victory of the American way, Henry Ford in a bicycle shop, Steve Jobs in a garage.
But Clay knew that mankind owed just as much or more to “sustaining” innovation.
Sustaining innovation is the extraordinary work of advancing an established technology to continue to meet the ever more extraordinary demands of the most demanding customers.
These are the customers who define business models, cultures, and entire economies by demanding more from entrepreneurs than it seems possible to give.
Over time, as Clay knew, sustaining innovation becomes ever more challenging. And the number of companies that can participate declines, sometimes quite rapidly.
This is one of those times. We are at an inflection point for sustaining innovation.
Seventy years after the invention of the integrated circuit, 40 years since the first fiber optic networks, 30 years since mobile phones went digital, each of these technologies is hitting physically intransigent limits. Not absolute limits, but limits so daunting that fewer and fewer firms can cross to the other side.
Innovation will not halt. It is accelerating. So are the profits that innovation is bestowing. But the game is narrowing. Contenders are falling by the wayside
Jesus said, “first shall be last and last shall be first.” We all love that.
But he also said “to everyone who has will more be given, and he will have abundance; but from him who has not, even what he has will be taken away.”
We don’t like to think about that so much. It’s time to think about it.
Tomorrow: The limits we face and the narrowing path to victory.
Lead Analyst, The George Gilder Report
Lead Analyst, The George Gilder Report