Up-Close on Strategy with Lead Analyst of the I/O Fund
August 06, 2021
Lead Tech Analyst
Recently I joined Ed Gotham from CMC markets in the Opto Sessions podcast. I discussed what tech trends will shine in the next five to ten years, how I started I/O Fund, and how we spot the right tech stocks. Also, don’t miss out on the quick-fire questions towards the end of the session.
Please note, this interview was recorded on June 18th, 2021 and later released on June 28th, 2021
Here's a timeline followed by a written summary of the key points:
02:06 IPO valuations
07:50 Trends for the next 10 years
09:00 Isn’t Waymo going to kill AI
17:29 Market inefficiency with tech
25:43 Snowflake vs Fastly
29:28 Background of Beth Kindig
33:04 I/O Fund focus
36:56 Electric vehicles
41:54 Thoughts on investing in Chinese market
49:25 Strategy at I/O Fund
59:23 Market trends
1:01:49 Favorite pick
1:06:01 Destructive theme
Trends for the next decade
I believe that Artificial intelligence is an important theme for the next five to ten years. I have a decade working in the tech industry, which helps me to understand the key trends. It’s difficult for someone who is not from a tech background to pick good AI stocks. The reason is that a lot of companies use the buzzword “AI” in their description, and many companies are not actually AI companies.
The optimal innovation will come from private companies. Even though big companies like Google might spend a lot on research and development; they will have to rely on M&A to truly beat their competitors.
When I was working as a privacy advocate around the time mobile data was creeping into every marketer and advertiser’s coffer, I had raised concerns about companies tracking customers without their consent through cookies. With AI, companies do not need to track a customer’s every move. For example, Netflix’s recommendation engines are run on AI. When a customer chooses a few movies, Netflix’s AI will figure out what you might want to watch next without tracking your every move, like the data collection practices of the last decade.
Manufacturing and agriculture are also becoming AI industries. For example, John Deere is a prominent company in robotics. When you look from a budget perspective, the returns on automation are attractive to corporations.
The market is inefficient with tech because tech does not cooperate with forward earnings revisions and cash flow analysis. It is all about the product and so investors have to understand the product and see where the company is headed on a product road map before the market spots it. This was the case of Nvidia back in 2018 when the market could not price it correctly. Meanwhile, if you looked at the product and understood it, you would know that Nvidia was the best choice for the AI accelerator chip because of its parallel computing.
Palantir went public at the same valuation as their last private round; this was the reason why the stock doubled. That was a smart move. I had a done a deep dive analysis on Palantir and the reason why I passed on this company is because they have a lot of government contracts. I have seen in the past that companies with government contracts can make it difficult for them to move to the commercial space. It doesn’t mean that they cannot pull off, but that particular risk was too significant for us to invest at the onset.
I arrived in the Silicon Valley area in the year 2010. I initially worked with real estate companies to fund my education. I then started to write about private tech companies and the granular differences between products. I worked with many startups writing about their products and also worked as a product evangelist for a holding company.
I can build a portfolio of 30 companies from 10 different technologies because I worked with 300+ startups. I was at security conferences, ad tech conferences, streaming media & OTT conferences, among others, and my job was to communicate very clearly why you should go with a particular product over its competitors.
What is I/O Fund focus?
Similar to how I covered private companies, I figured it could be helpful to provide the same level of analysis on public companies and describe why a particular company will be a winner before the market is able to accurately price the company. I started to write about public markets and people made good money on my articles. Some of the stocks I wrote about did very well.
In July of 2019, I joined with a portfolio manager who knows how to build a portfolio. His expertise is in technical analysis and analyzing charts. We began to cover tech stocks together. I strongly believe technical analysis is very much required for tech stocks. One reason is that tech companies can rise 400 percent in a year and the same company can drop 70 percent. So, this is why technical analysis plays an essential role while in addition to product analysis and financial analysis on tech companies.
In May 2020, we combined our money and launched what we call a fund. We transparently send notifications to our subscribers every time we enter or exit stocks. Readers can transparently know we are actively entering these quality companies that we have identified (or perhaps we are pausing and not entering for the time being). Our gains are outstanding and we are ahead of Ark funds partly due to large positions in Bitcoin and Blockchain.
Chinese Electric Vehicles
I stated on the podcast that Chinese EV companies will do well. The people in China are nationalists. The government is giving subsidies for buying Chinese electric vehicles and they are very particular about what tech products are supported (or subsidized). Xpeng and other Chinese electric vehicle companies teamed up with Nvidia for AI features. This helped companies like Xpeng and NIO to develop autonomous features on their cars. Semiconductor companies also benefited from this trend. In contrast, Tesla tried to manufacture their own chips, which in my opinion, is a mistake.
There are risks as a US investor investing in Chinese stocks and it depends on the style of investing. If you are regularly looking into the markets and you are an active investor, buying Chinese companies makes sense; otherwise you have better opportunities in the US if you are a passive investor. In the case of the I/O Fund, our portfolio manager keeps an eye on the markets so we can take advantage of higher volatility.
Strategy at I/O Fund:
Our strategy is to leverage experts from the tech industry and to do deep dive research on stocks. We are very good at shutting out the noise in the market. We believe long-form research has an important, long shelf life. FAANG has shown us that good tech companies will remain quality stocks for 10 to 20 years. We are always looking for buy and hold. We also add momentum so that we make strong gains in six months. We will invest until it peaks and then trim and let it fall.
Most of what I wrote in 2018 is very accurate even after three years, as proven by the earnings call and product roadmap. Knox is very good at trend following. We believe a blend of both is required. We are also very much diversified within tech, which is why we can beat Ark, including our exposure to Bitcoin. As a technology analyst, I see blockchain, bitcoin, and ethereum differently than people who are not from the tech industry. Even though Cathie Wood had spoken about Bitcoin, she did not take the big bets necessary to have gains in the last few months like we did. Notably, I’ve been covering crypto since 2013 and feel strongly that the security (due to hashrate) behind Blockchain is a technological wonder and overlooked by the talking heads on TV.
Regarding our specific portfolio/risk strategy, two-thirds of our portfolio as a long-term buy and hold, and the other one-third is more active.
We have seen many initial public offerings (IPOs) at sky-high valuations in the last couple of years. Despite the excellent product, Zoom took about 10 to 12 months to consistently trade above its opening price. Zoom is a good case study as the company had the highest growth rate at year 6 of any tech company that has gone public and was profitable.
If you had bought Zoom in July of 2019, for example, you would be holding losses until February 2020. I count holding a non-performing asset for this long as a double loss as the allocation could have gone to a better investment and seen gains during the same time period.
Snowflake is another excellent example; it went from a $12 billion valuation during its last private round to a $68 billion valuation within a year. On the other hand, Airbnb went from $18 billion to $90 billion in just six months. I strongly believe that overnight rise in valuation cannot sustain. At the I/O Fund, we have an excellent risk management process in place to protect our portfolio in these challenging situations.
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