Saturday, February 4, 2023

When Making Career Choices, Choose Wisely

I once had a management professor give one bit of advice to people just entering the workforce. When choosing an industry to work in, it is better to choose a fast-growing industry rather than a slow-growth or declining industry. 


If one has a choice, it is helpful to be in an industry forecast to show lots of growth, which also often correlates with other valuation ratios, such as enterprise value/revenue. 


Here is a ranking of industries made by Stern School at New York University researchers and updated in January 2023. Looking at EV/Sales ratios, one can see that valuation ratios can routinely vary by an order of magnitude. 


Financial services and real estate investment trusts routinely are valued at 10 to 20 times specialty retailers and as much as 63 times higher than grocers. Compared to fixed network communications services, financial services are an order of magnitude more highly valued. 


IndustryValuation Enterprise Value Compared to Sales Ratio

Industry Name

Number of firms

Price/Sales

Net Margin

EV/Sales

Pre-tax Operating Margin

Financial Services (Non-bank and Insurance)

223

2.18

26.32%

23.49

15.88%

R.E.I.T. 

223

6.35

23.77%

11.06

23.20%

Utility (Water)

16

6.43

25.12%

9.18

29.38%

Green & Renewable Energy

19

3.68

17.77%

7.79

24.48%

Software (System & Application)

390

7.14

14.61%

7.59

21.90%

Software (Internet)

33

5.57

-19.07%

6.33

-5.48%

Transportation (Railroads)

4

5.04

27.65%

6.32

39.86%

Information Services

73

5.77

16.62%

6.26

24.21%

Drugs (Biotechnology)

598

5.78

0.65%

6.18

11.87%

Healthcare Information and Technology

138

4.81

-0.33%

5.33

17.00%

Investments & Asset Management

600

4.15

24.93%

5.16

18.15%

Healthcare Products

254

4.73

7.00%

5.15

15.13%

Tobacco

15

4.19

23.46%

5.05

43.97%

Semiconductor

68

4.63

22.74%

4.98

25.44%

Drugs (Pharmaceutical)

281

4.38

18.35%

4.85

27.37%

Beverage (Soft)

31

4.16

14.60%

4.67

19.14%

Bank (Money Center)

7

2.55

26.96%

4.49

0.10%

Brokerage & Investment Banking

30

2.14

16.01%

4.46

0.31%

Banks (Regional)

557

3.2

30.31%

4.34

-0.10%

Utility (General)

15

2.47

12.68%

4.28

18.03%

Hotel/Gaming

69

2.75

1.10%

4.2

4.23%

Beverage (Alcoholic)

23

3.38

5.76%

4.07

20.17%

Restaurant/Dining

70

3.16

9.28%

4.07

12.80%

Real Estate (General/Diversified)

12

3.14

12.67%

4.02

18.60%

Power

48

2.14

9.17%

3.75

15.67%

Computers/Peripherals

42

3.41

16.68%

3.67

21.43%

Semiconductor Equip

30

3.43

22.27%

3.66

27.44%

Household Products

127

3.23

11.25%

3.65

17.12%

Software (Entertainment)

91

3.54

20.91%

3.59

25.65%

Telecom Equipment

79

3.31

13.29%

3.56

18.63%

Precious Metals

74

3.3

7.18%

3.55

10.10%

Shoe

13

3.06

11.17%

3.22

12.83%

Telecom (Wireless)

16

1.98

2.54%

3.18

12.37%

Entertainment

110

2.47

0.90%

3.06

7.44%

Environmental & Waste Services

62

2.44

7.29%

3.03

12.85%

Real Estate (Development)

18

1.42

15.04%

2.81

17.48%

Total Market

7165

1.95

8.89%

2.8

11.60%

Electrical Equipment

110

2.38

7.31%

2.77

10.25%

Machinery

116

2.28

8.51%

2.67

14.00%

Oil/Gas Distribution

23

1.54

2.08%

2.6

10.82%

Aerospace/Defense

77

2.1

4.05%

2.55

8.68%

Diversified

23

2.16

0.98%

2.5

3.59%

Chemical (Specialty)

76

2.05

8.07%

2.48

14.80%

Cable TV

10

1.19

7.91%

2.43

19.52%

Total Market (without financials)

5649

1.93

7.77%

2.35

12.03%

Telecom. Services

49

1.01

12.81%

2.18

19.95%

Insurance (General)

21

1.7

15.21%

2.16

21.86%

Construction Supplies

49

1.72

8.23%

2.15

11.16%

Oil/Gas (Production and Exploration)

174

1.83

26.01%

2.12

35.68%

Food Processing

92

1.66

7.10%

2.1

11.94%

Metals & Mining

68

1.86

9.66%

2.06

22.84%

Business & Consumer Services

164

1.69

4.92%

2.05

9.22%

Advertising

58

1.49

3.79%

1.96

11.11%

Retail (Building Supply)

15

1.64

8.67%

1.96

13.81%

Electronics (General)

138

1.73

6.32%

1.94

9.83%

Retail (Online)

63

1.63

0.64%

1.87

1.84%

Education

33

1.57

2.92%

1.85

5.16%

Auto and Truck

31

1.32

5.02%

1.81

6.49%

Recreation

57

1.22

1.30%

1.77

8.31%

Hospitals/Healthcare Facilities

34

0.85

5.31%

1.57

11.62%

Retail (Distributors)

69

1.06

7.30%

1.45

11.90%

Trucking

35

1.07

1.29%

1.45

9.18%

Coal & Related Energy

19

1.35

20.44%

1.43

22.17%

Insurance (Prop/Cas.)

51

1.21

4.05%

1.39

6.49%

Oil/Gas (Integrated)

4

1.31

15.17%

1.39

17.46%

Building Materials

45

1.1

10.30%

1.36

13.94%

Broadcasting

26

0.6

11.90%

1.33

14.75%

Insurance (Life)

27

0.83

6.07%

1.33

8.39%

Packaging & Container

25

0.79

6.06%

1.25

9.63%

Farming/Agriculture

39

0.94

5.66%

1.22

7.78%

Computer Services

80

0.93

2.53%

1.17

6.89%

Apparel

39

0.81

5.07%

1.16

11.11%

Publishing & Newspapers

20

0.88

2.82%

1.16

7.75%

Engineering/Construction

43

0.87

2.16%

1.08

4.69%

Transportation

18

0.89

6.99%

1.08

9.38%

Shipbuilding & Marine

8

0.82

21.55%

1.07

26.33%

Air Transport

21

0.42

-1.71%

1.02

2.08%

Real Estate (Operations and Services)

60

0.52

-0.76%

1

0.50%

Retail (Special Lines)

78

0.72

3.86%

0.97

5.74%

Office Equipment & Services

16

0.6

2.36%

0.93

6.26%

Chemical (Diversified)

4

0.64

13.16%

0.91

13.56%

Retail (Automotive)

30

0.59

4.07%

0.91

5.73%

Chemical (Basic)

38

0.63

9.70%

0.89

13.14%

Furn/Home Furnishings

32

0.6

2.03%

0.88

7.89%

Homebuilding

32

0.71

13.98%

0.85

18.79%

Auto Parts

37

0.62

2.16%

0.82

5.19%

Retail (General)

15

0.7

2.35%

0.81

4.12%

Electronics (Consumer and Office)

16

0.78

0.54%

0.78

2.11%

Paper/Forest Products

7

0.58

10.23%

0.77

18.59%

Healthcare Support Services

131

0.61

2.01%

0.69

4.00%

Steel

28

0.58

14.70%

0.68

19.89%

Reinsurance

1

0.58

3.54%

0.63

4.64%

Oilfield Svcs/Equip.

101

0.47

5.25%

0.58

7.37%

Rubber and  Tires

3

0.14

4.21%

0.55

5.84%

Food Wholesalers

14

0.29

1.09%

0.41

2.10%

Retail (Grocery and Food)

13

0.24

1.96%

0.37

2.92%

source: https://pages.stern.nyu.edu/~adamodar/pc/datasets/psdata.xls


The point is that, when one has a choice, choose to enter an industry with higher growth rates or higher valuation ratios or both. 


The same sort of relationship also holds for managerial success, once those choices have been made. It is easier to be a “hero” when one has worked in a fast-growing, more-profitable industry to begin with. The same amount of effort and talent is likely to produce consistently higher outcomes compared to the same effort and talent expended in a slow-growth, lower-valuation industry. 


Of course, one has to evaluate the particular valuation metrics used. Also, not every ranking, even using the same metric, will produce the same results. That can be the case when industries routinely rely on different amounts of debt financing, when “cost of goods” is disparate, or when a ranking is unrepresentative of all firms in an industry (focusing only the largest firms, for example). 


Industry

EV/Revenue

Publishing

31.54

EDP Services

23.45

Construction/Ag Equipment/Trucks

19.54

Computer Software: Prepackaged Software

17.81

Biotechnology: Biological Products (No Diagnostic Substances)

17.75

Real Estate Investment Trusts

17.62

Retail: Computer Software & Peripheral Equipment

17.18

Biotechnology: Electromedical & Electrotherapeutic Apparatus

16.85

Managed Health Care

14.97

Ophthalmic Goods

14.57

Business Services

14.37

Finance: Consumer Services

14.29

Real Estate

12.69

Auto Manufacturing

12.53

Multi-Sector Companies

10.34

Biotechnology: Commercial Physical & Biological Research

10.33

Medical/Dental Instruments

10.17

Advertising

9.96

Semiconductors

9.82

Investment Bankers/Brokers/Service

8.57

Oil & Gas Production

8.51

Hotels/Resorts

8.29

Beverages (Production/Distribution)

7.85

Major Pharmaceuticals

7.75

Other Consumer Services

7.38

Specialty Chemicals

7.31

Environmental Services

7.16

Industrial Machinery/Components

6.81

Misc Health and Biotechnology Services

6.78

Biotechnology: In Vitro & In Vivo Diagnostic Substances

6.68

Restaurants

6.62

Investment Managers

6.62

Industrial Specialties

6.54

Movies/Entertainment

6.51

Building operators

6.25

Telecommunications Equipment

6.19

Other Transportation

6.15

Diversified Commercial Services

6.08

Electrical Products

6.01

Television Services

5.95

Electric Utilities: Central

5.72

Radio And Television Broadcasting And Communications Equipment

5.59

Services or Misc. Amusement & Recreation

5.5

Savings Institutions

5.35

Rental/Leasing Companies

5.31

Water Supply

5.22

Internet and Information Services

5.19

Diversified Financial Services

5.15

Railroads

5.08

Biotechnology: Laboratory Analytical Instruments

5.03

Precision Instruments

5.01

Medical Specialties

4.89

Power Generation

4.74

Motor Vehicles

4.65

Oil/Gas Transmission

4.62

Specialty Foods

4.52

Military/Government/Technical

4.43

Assisted Living Services

4.41

Package Goods/Cosmetics

4.22

Diversified Manufacture

4.01

Metal Fabrications

3.98

Finance/Investors Services

3.94

Medical Electronics

3.86

Ordnance And Accessories

3.82

Wholesale Distributors

3.75

Office Equipment/Supplies/Services

3.66

Natural Gas Distribution

3.55

Broadcasting

3.49

Fluid Controls

3.46

Banks

3.46

Tools/Hardware

3.35

Oilfield Services/Equipment

3.29

Commercial Banks

3.24

Computer peripheral equipment

3.23

Major Chemicals

3.12

Medical/Nursing Services

3.11

Aerospace

3.06

Major Banks

3.04

Specialty Insurers

3.01

Life Insurance

2.91

Agricultural Chemicals

2.88

Paints/Coatings

2.85

Building Materials

2.84

Homebuilding

2.8

Air Freight/Delivery Services

2.79

Building Products

2.78

Computer Software: Programming Data Processing

2.68

Farming/Seeds/Milling

2.6

Other Metals and Minerals

2.56

Recreational Products/Toys

2.54

Catalog/Specialty Distribution

2.54

Shoe Manufacturing

2.5

Precious Metals

2.5

Other Specialty Stores

2.3

Consumer Electronics/Video Chains

2.24

Electronic Components

2.23

Computer Manufacturing

2.2

Steel/Iron Ore

2.19

Professional Services

2.18

Packaged Foods

2.17

Marine Transportation

2.12

Containers/Packaging

2.09

Electronics Distribution

2.07

Trucking Freight/Courier Services

2

Service to the Health Industry

2

Newspapers/Magazines

2

Consumer Electronics/Appliances

1.95

Meat/Poultry/Fish

1.93

Home Furnishings

1.93

Apparel

1.77

Auto Parts: O.E.M.

1.76

Integrated oil Companies

1.73

Hospital/Nursing Management

1.71

Pollution Control Equipment

1.65

Automotive Aftermarket

1.57

Aluminum

1.57

Coal Mining

1.54

Textiles

1.5

Department/Specialty Retail Stores

1.49

Food Distributors

1.47

Paper

1.4

Clothing/Shoe/Accessory Stores

1.35

Plastic Products

1.31

RETAIL: Building Materials

1.15

Engineering & Construction

1.09

Consumer Specialties

1.04

Property or Casualty Insurers

1.01

Transportation Services

0.99

Accident & Health Insurance

0.98

Oil Refining/Marketing

0.93

Tobacco

0.92

Other Pharmaceuticals

0.92

Finance Companies

0.91

Trusts Except Educational Religious and Charitable

0.79

Forest Products

0.51

Food Chains

0.31

source: https://eqvista.com/revenue-multiples-by-industry/




Friday, February 3, 2023

Meta Building in AI Compute While Saving Money?

For investors, the highlight of Meta’s fourth quarter 2022 earnings report was the improvement in profit margin. For others it was the new emphasis on “efficiency,” including better use of capital investment, flattening the organization and moving faster to cut projects that are not showing nearer term upside. 

For some, the interesting parts also include some apparent new thinking at Meta about how to design data centers supporting both artificial intelligence and other workloads in a way that is less costly.

“We expect capital expenditures to be in the range of $30-33 billion, lowered from our prior estimate of $34-37 billion,” said Susan Li, Meta CFO. “The reduced outlook reflects our updated plans for lower data center construction spend in 2023 as we shift to a new data center architecture that is more cost efficient and can support both AI and non-AI workloads.”


For some, that comment about “lower cost” data centers might have been interesting as well. 


One issue appears to be the difference between centers able to support artificial intelligence and all other workloads. 


Supercomputers might be one example of the change. Will we see more data centers that are optimized for AI workloads? And are such specialized facilities needed mostly to build the inference models? If so, that implies that the non-real-time training can be done at specialized facilities, while the actual applications run closer to end users and the edge. 


But Meta also is saying that the new data center architecture combines AI and standard workloads, which implies some new way of assigning functions and running the workloads. 


 Is a shift of compute towards the edge also part of the architectural shift? 


And some of the savings might come from a more modular approach to assets, which is not new, but might be operationally more important. 


“Along with the new data center architecture, we're going to optimize our approach to building data centers,” Li said. “So we have a new phased approach that allows us to build base plans with less initial capacity and less initial capital outlay, but then flex up future capacity quickly if needed.”


Friday, January 13, 2023

Airbus AI Illustrates Adoption Process


Many new technologies follow a familiar adoption pattern: they are introduced as an augmentation of the prevailing platrom, producing a "hybrid." As in this case, automated control of aircraft is likely to appear as a backup to live human pilots, and for emergency use. 

Over a period of time, humans will gradually get used to wider uses, as they now accept autopilot operations when they travel on commercial airliners. Early evidence suggests a similar adoption process for automated vehicles. "Niches" are great ways to introduce new platforms.

For automarted vehicles, perhaps long-haul trucking winds up being an early usage mode. As safety, familiarity and value get demonstrated, people will start to add other use cases over time. 

Some of you might recall selling some access network products as a "backup" to a primary link. Over time, the backup was deemed reliable enough to displace the primary solution. 

That has been a staple for competitors and upstarts in computing and communications for decades. A new provider acknowledges some feature limitations, but pitches the solution as a backup, for redundancy, for example. Over time, feature sets get better, until one day there is no big distinction between the legacy provider and the former upstart. MCI did precisely that when challenging AT&T in the long distance communications markets. 

A classic example from outside the communications business is steam power on ships. Most early adoption was "steam plus sail." 

Not many humans would today say they are comfortable flying in an autonomous aircraft with no human pilots onboard, much as many would say they remain uncomfortable with fully autonomous vehicles for everyday use. 

So hybrid deployments are virtually inevitable, often using the new platforms in specialized and limited ways, at first. 

Friday, December 23, 2022

Does Technology Leadership Lead to Financial Outperformance? Maybe Not

High achievers exist in virtually every sphere of life and business. Leaders and laggards often are differentiated by heavy use of digital technologies, so many equate profiency with digital technology and outperformance. 


But profits and technology use do not seem to correlate all that closely. Financial results often do not correlate with digital technology spending. Some studies show a small percentage of firms with high profits also are digital technology leaders. 


It is always possible that the expected correlation between digital investment--”digital transformation or digitalization”--exists only weakly. That suggests organizational high performance is not necessarily and directly caused by the investment.


Some firms might have been better at thinking through how the technology could boost performance. Those firms might have other assets and levers to pull to maximize the impact and return. 


High-performing firms (probably measured by revenue growth or profit margins and growth) that excel with technology might also tend to be firms that manage people, operations, acquisitions, product development, logistics or other functions unusually well. Perhaps high-performing organizations also have unique intellectual property, marketing prowess, better distribution network skills. 


In fact, digital technology success appears relatively random, where it comes to producing desired outcomes. In part, that is because it will be devilishly difficult to determine the technology impact on knowledge work or office work productivity at all. 


So productivity measurement is an issue. To be sure, most of us assume that higher investment and use of technology improves productivity. That might not be true, or true only under some circumstances. 


Nor is this a new problem. Investing in more information technology has often and consistently failed to boost productivity.  Others would argue the gains are there; just hard to measure.  There is evidence to support either conclusion. 


If the productivity paradox exists, then digital transformation benefits also should lag investment. Before investment in IT became widespread, the expected return on investment in terms of productivity was three percent to four percent, in line with what was seen in mechanization and automation of the farm and factory sectors.


When IT was applied over two decades from 1970 to 1990, the normal return on investment was only one percent.


So this productivity paradox is not new. Information technology investments did not measurably help improve white collar job productivity for decades. In fact, it can be argued that researchers have failed to measure any improvement in productivity. So some might argue nearly all the investment has been wasted.


We have seen in the past that  there is a lag between the massive introduction of new information technology and measurable productivity results, and that this lag might conceivably take a decade or two decades to emerge.


The Solow productivity paradox suggests that technology can boost--or harm--productivity. Though perhaps shocking, it appears that technology adoption productivity impact can be negative


That there are leaders and laggards should not surprise. That there are higher performers and trailing performers in business should not surprise. Perhaps leaders outperform for reasons other than technology.


Thursday, December 22, 2022

ChatGPT Hype is All About Automated Content Creation

Chat Generative Pre-trained Transformer, or ChatGPT, is the hype term of the moment. The interest comes from ChatGPT abilities to create content and provide conversational results to an inquiry. It essentially promises to connect artificial intelligent processing with automatic conversational responses. 


The applications for customer service are obvious. Also perhaps obvious are applications that could augment or replace “search,” or “writing.” As TikTok alarmed Facebook, perhaps ChatGPT now alarms Google. 


The big deal is the ability to create content based on existing content and data. It is not so much a use case related to the equivalent of human “thinking” as to “content creation” based on precedent and existing data. 


Generative AI is the larger trend that ChatGPT is part of. AI-created original content is the promise. An annual or quarterly report, for example, is a fairly structured document drawn from existing data, the sort of thing generative AI is supposed to be good at. News stories, sports scores and advice (legal, financial, business strategy, for example) are the sorts of content that are based on existing formats, precedents, databases and conventional wisdom or rules of thumb. 


source: Sequoia Capital 


When to buy a product; why it provides value; how to buy; where to buy; from whom to buy; understanding pros and cons are some of the questions generative AI is ultimately expected to provide. 


What options might be in any legal matter, what the precedents are, and what courses of action can be taken are legal questions all based on past experience. “How to invest, at a given age, with assets of different amounts, with defined goals, in what instruments, for how long, and why” are all questions with answers based on clear rules of thumb used by financial advisors. 


The uses in education, which mostly consists of knowledge transfer, are endless. 


It probably is not too hard to see how generative AI could be used to create personalized marketing, social media, and technical sales content (including text, images, and video). 


Some believe generative AI could write, document and review code. Applications in many other fields, ranging from pharmaceutical development to health outcomes, in fact all human endeavors with large existing data sets and “expert” advice, could be enhanced. 


Anywhere there are patterns in data, and lots of data to be worked with, it is possible that generative AI could add value. The more complicated processes are--such as weather--the more value could be obtained, in principle. Generative AI essentially creates based on existing data. So the more data, the more creation is possible. 


Is that “new” content derivative? Yes.It is based on the existing data, which can be manipulated and displayed in original ways. And generative AI is about creating content, not “thought.” But content creation is expensive and important in almost every sphere of life. 


The hype will pass. But disruption and substitution clearly can be seen as possible outcomes, eventually. Anywhere content has to be created, where there are existing rules of thumb about what is important, where lots of precedent and data exists, where some questions have obvious standard answers, generative AI is likely to be valuable and important. 


It is not simply content creators, but advice givers that could ultimately see their output devalued. If you ask me when MPLS adds value, and why, and how it compares to SD-WAN, there are a limited set of answers I can provide that correspond with industry wisdom about such choices. 


Over time, a greater number of questions will have answers computers can assemble and deliver. It’s coming, if not right away.


Tuesday, December 20, 2022

Meta Mixed Reality Viewed as Key to Next Generation of Computing

Meta has gotten criticism in some quarters for allotting as much as 20 percent of its research and development spending for new products, rather than existing products. Investors argue Meta is spending too much, too soon on metaverse products and software that might not be commercially viable for some time. 


Meta, on the other hand, is betting on possible leadership of the next generation of computing, and believes its investments now will pay off. 


If one believes in product life cycles, then one is forced to look at business strategy as including the development of new products to replace sales of products with declining demand. That, in turn, presupposes capital allocation and effort to discover or create those new products. 


Virtually nobody disagrees with that general principle. But as with staffing levels at software and technology firms, there is concern firms have “overhired,” and need to cut back on spending in the face of expected recession in 2023 and possible slower growth beyond. 


It should be noted that financial analysts often prefer that firms “stick to their core” business while business strategists more often emphasize what is needed to ignite and sustain growth. Either view has merit at times. 


Much the same possible divergence of opinion about research and development investment also exists. 


Some industries invest more in research and development than do others. Pharmaceutical, information technology and computing industries are heavy R&D spenders, for example. Computing and technology firms spend about 13.6 percent of revenue on R&D, for example. In many cases, R&D as a percentage of gross profits is higher. 


But Meta has in recent years been a heavy spender on R&D, compared to other firms. Microsoft, for example, spent 13 percent of net sales on R&D in 2020, compared to Meta’s 22 percent level.  


At least right now, many criticize Meta’s investment priorities. Meta seems determined to plow ahead. And few public companies of its size have a governance structure that allows Meta to proceed aggressively, without risking pushback from its equity investors. 


One can always make the argument that some of the R&D investment is essentially wasted, and that Meta might be able to achieve what it wants at a lower spending level. But that is a judgment call. 


But a recent statement by Andrew Bosworth, Meta CTO, makes clear the firm’s continued belief that mixed reality is so vital that high levels of research and development must be sustained, even as 80 percent of research and development continues to support existing lines of business. 


We may agree or disagree, but Meta is clearly betting that something else is coming, and that Meta has to spend now to lead that “something” that comes next, and represents the next era of computing.


MWC and AI Smartphones

Mobile World Congress was largely about artificial intelligence, hence largely about “AI” smartphones. Such devices are likely to pose issue...