London South East 00:01
You are listening to Investing Matters brought to you in association with London South East. This is the show that provides informative educational and entertaining content from the world of investing. We do not give advice, so please do your own research.
Peter Higgins 00:19
Hello and welcome to the Investing Matters podcast.
My name is Peter Higgins and today, I have the huge privilege of speaking to the hugely talented multi award winning information technology and software analyst George O’ Connor, George has got 25 years of experience working in the investment industry across many prominent companies, for those of you that are new to the Investing Matters series, and who missed George's interview back in July 2022, please go and check out podcast number 18.
Therefore, I highly recommend you to go and listen to that fully, and get a grasp of where George has been and what he's done.
I'm interviewing George again, because what has happened in the past 18 months, which George is going to share some of that with us in this interview, which we are doing now in 2024.
George, welcome back and thank you for agreeing to speak with me again and to share your vast tech experience and knowledge with our global Investing Matters audience Sir.
George O’Connor 01:23
Hey Peter, thank you very, very much for this opportunity to come back and hopefully address all of the wrongs that I gave you 18 months ago, and let's set the record straight. The problem is, in this age, it just lives online forever.
Peter Higgins 01:41
George, you nailed lots of very, very, very accurate statements in 2022 mate and things have moved on a little bit more, we've got to cover a lot of ground today.
So just let's give the audience a bit of groundwork here including Magnificent Seven, FTSE, AIM investing opportunities, risks, mergers, acquisitions, takeovers, and much much more.
So this is why I've got you in here.
You're the you're the expert, and you're going to answer a lot of questions for us and ensure that our investors that are listening go away from this podcast enlightened I think that's the word of insightful information.
Now, George, I know the answer to this question already.
However, for the benefit of our listeners, please, I appreciate that you're a humble man.
Therefore, this is not a very comfortable question for me to ask you.
But I'm going to do it anyway because we're friends.
Okay, but can you give us quickly a synopsis as to your career thus far?
What you've achieved in the investment industry so that our audience fully understands why the City holds you so rightfully in such high regard, sir?
George O’Connor 03:00
Okie dokey.
Thank you, Peter, for setting me up, very decent of you.
If I can say I fully support what you're doing for me the democratisation of information and data is hugely important.
Your audience is hugely important to me, and I think you're doing an amazing job with what you're doing.
So kudos to you. In terms of me, as you said, I've been doing this for 25 years in the City covering technology.
So defining technology fairly narrowly software and IT services, but if necessary, I'll do e-comm stuff.
And if absolutely necessary, I'll do hardware stuff, done lots of IPOs and lots of secondaries, and even the odd rescue rights, prior to the City, I was an industry analyst working with IDC, so vendors, their customers, there would be large, IT vendors, large buyers of technology, both private and public sector in terms of why I'm valued, if I can be so bold, I think it's this sort of been there done that kind of thing that at the same time and in fairness, we all have spent the last year getting our heads around Gen AI and what is Gen AI, it's a large language model or the LLM to give it the acronym that it's best kown for, and what is that? It's a huge amount of data and what does it do?
It has hallucinations every once in a while and what also does it do it's about generating content, which is the new in terms of Gen AI.
And what that does, is that it gives you answers based on plausibility, doesn't have to be right.
It's about plausibility and when I step back from it, I think crikey, maybe I am the sort of the human personification of an LLM.
That's where my career path.. I too, suffer from hallucinations, I to suffer from plausibility, rather than having it right for me, the key is curiosity.
I love the subject, unfortunately, it's just about technology.
If I'm ever talking about commodities, you know, I'm in the wrong room, or rather, we're not in Kansas, I love the subject. I'd like to think I'm curious, I really enjoy small companies, because you're sort of always looking for the new. So that would be I would imagine my USP if that's not two grand, a title.
Peter Higgins 06:11
Brilliant, I love that response to us and you're always touch on the fact that you're very, very curious.
Hence the reason why, you know, you're fantastic at research, you know, and you're right, a lot has moved on over the past 18 months.
So I want to go back to where something we covered on the last podcast and interview we spoke 18 months ago, George, now about the lifecycle model of technology.
What in your view has been the most significant changes we've seen across technology ecosystem, since we last spoke?
George O’Connor 06:44
Great point and well done you for referencing lifecycle model, because if there's been any sort of change in terms of 18 months ago, it goes back to the lifecycle model.
And the fact that now talk to any sort of not just sell side analysts, but industry analysts likes of Gartner, TechMarketView, IDC, everyone is now talking about that lifecycle model in the fact that Gen AI has introduced a new point of that cycle.
So it's a super exciting time, not just for the pair of us, Peter, but indeed for all of your subscribers, as we can see something new on the horizon.
And what that does is that it gives us the opportunities of new technologies. Now we all appreciate, as we look at lifecycle model, that we've got this lovely S curve.
So we start small, and then we accelerate into it. And I'm reminded by one of your podcasts, you had Stephen Yiu, and he was saying, were just at the start of what Gen AI offers, in terms of the tech industry.
And I fully concur, now we've had a number of sorry, Gen AI in itself isn't new, it's been around for a while, if we look at the whole sort of development path of AI, we've had a number of false dawns already, but this time, it does feel as if it's hitting prime time, and there's plenty of opportunity, and road ahead.
Now what we also know is that in the initial stages of new technology, if we go back to the dotcom days, the market now will be characterised by winners and losers, in terms of the losers will have legacy tech miss, the sort of the tech change are slow to adopt to the new.
And then in terms of winners, that there's a number of attributes there as well.
So we have sort of net new companies, we have existing companies that are able to pivot successfully into it.
So you know, for example, the winner in getting into your Magnificent Seven point that we perceived as Nvidia, Nvidia has been around for a long time, this is a new startup out of Silicon Valley.
But then the next iteration of it haven't seen yet is companies sort of natives who are using this technology to do brand new thing to move business models into new areas.
And they're possibly a good example.
If we look to the UK, somebody like ASOS or Ocado, they were only founded in the year 2000.
So the underpinning technology around dotcom stuff, e-comm systems, they were already established by then.
So for me part of the opportunity now is that the really interesting companies that take us through the next decade are only being founded right now in this, the UK has a huge opportunity.
We already have an existing stable of AI companies were sort of number two in Europe in terms of the development and foundation of AI startups. And that creates massive opportunities for you. And indeed your subscribers, but not yet.
Peter Higgins 10:22
I love that response George and we're going to cover the Magnificent Seven and the UK markets a bit more later on.
I want to touch on something here though, should we caveat some of the AI hype, especially given the hype on the less than 18 months ago, the vast sums of money that was spent on what was then the metaverse hype now versus AI and we barely hear anything talked about the metaverse.
George O’Connor 10:49
Very good.
So one of the really interesting things about last year, 23, was that Gen AI basically eclipsed all other tech themes, there was nothing else we needed to talk about.
It was only Gen AI and if anyone had another story, it was just going to be dismissed by the market anyway.
And you could say, as you overlay, if you look at say the Gartner Hype Cycle where it's sort of a peak there in terms of the hype wave, what we can never say is that this time, it's different because history tends to repeat lots of stuff is it is cyclical.
But what I think everyone is attracted to is the growth in adoption on Gen AI.
So for example, ChatGPT the fastest app to get to 100 million users.
Now, admittedly, Threads came along after that. But we've seen massive adoption from an end user perspective.
And you could say, George, a lot of that is tire kicking, absolutely.
A lot of that is tire kicking, we've also got use cases appearing in terms of what do I do with the text generation as I can create images and create voice outputs around it.
Then the other side is that if we look into the wider industry, we're finding the app vendors using it as well.
Possibly the best example not to go down the sort of the product placement route is Bing and what they're doing on search.
So making search easier for everyone but you can start to see it filter through into our lives if you're a university student.
Clearly it's great help for you, in turn, observe digging through chunks and chunks of data on one side, but then also, of course, creating the outputs.
On the other side part of the concerns, particularly in terms of text to image generation, at the moment is got the whole fake industry which is going to go ballistic.
So 2024 is a year is a big year for elections in terms across the world, just see what bad actors might be able to do there in terms of influencing broader democracy, I was interested in Gervais Williams, one of your contributors at your last podcast, he factored up the whole notion of political risk next year on the back of citizens doing what they're not expected to do, which I think could be very interesting.
And in terms of the direction of the markets in 2024, we can we can feel that Gen AI will be one of the underlying technology enablers for bad actors to do things, but in fairness, not just bad actors and in fairness not just students.
But if we look at the industry, generally, we're talking about a large dislocation in terms of roles.
So for me, I don't know for you, Peter, but a lot of my life is about fairly low value add data work where I'm inputting series of data.
And if we go back to Gen AI, what is it stands for will Gen AI is about generating brand new content. So you can have your copilot sitting right beside you, admittedly, it's an automation tool, and working together.
And what that should do is drive productivity. It's early days in it, but we are seeing productivity gains from software developers who are using Gen AI tools to write code, and indeed to verify code. So I completely understand your point.
Where’s VR gone? Nothing, what happened to AR, but what we saw in 2023, was Gen AI was a wave that came through and watched, it eclipsed all of the themes, that doesn't mean that they don't exist, that they've gone away, never to return, but they have absolutely been sort of, you know, sub moved by this sort of tsunami terms of Gen AI, one of my hopes, is that for 2024, we actually see more of those themes start to bubble up again, as some of that early enthusiasm around Gen AI.
So I think well, moving beyond the sort of the what now stage and it's too early in terms of broad corporate adoption, you know, what should we be looking at?
So, for example, if we look at the EVs industry, you can say we're still getting records, in terms of the numbers of cars and numbers of batteries.
But we still haven't seen enough enthusiasm and that was a bubble that predated that.
We've also got sort of Bitcoin, not so much Bitcoin, but in terms of blockchain and the underlying opportunities that technology can offer us as well.
So yes, lots and lots of things. I don't want to go down the rabbit hole here. But you know, what's happened to G Five?
What's happened to all of those really interesting IoT or Internet of Things, use cases that we would have been talking about four years, four years ago, G Five is there were almost sick of it where we want G Six now to start coming down, say a lot.
But again, lots to get really interested in. But yes, that was the shock of Gen AI just came in, and it rolled over everything.
Peter Higgins 16:28
Indeed, I mean, the interesting thing with regards to what you said about Bing and also the electric vehicles thing is all the AI that's going into the vehicles now and into the search, and we're also I don't think we're that far away from having inbuilt AI within our computers, there's talk about the next Microsoft computers and the next Apple computers have an AI built in, so we can expedite and do things much quicker going forward. So I don't know if it's going to be changed and a lot of work, I think, for a lot of people, which I will talk about a bit later on.
George O’Connor 17:02
Yeah, we're only at the start of a new cycle.
Peter Higgins 17:04
Right, so we've touched on it there a little bit, you know, 2023, and start 24 has been incredible for the US, behemoth tech stocks, most notably the Magnificent Seven, which we'll talk about later.
However, as you touched on, you're a growth guy George, you do a lot of work in terms of the underlying demand of equations, which is critical for researching stocks and ensuring that people get good value, therefore, you tend to go smaller rather than larger.
So firstly, tell me what data points and research process you go through for finding those smaller tech growth compounders please?
George O’Connor 17:43
Okey dokey, and I should add to it.
It's been a bad year for growth, it's been a bad year for tech growth, it's a better year for tech income.
Remember, in tech, you have lots of different types of companies, lots of different underlying business models, lots of different points of maturity in terms of the lifecycle model.
So you can play tech from a more conservative footing as well by the way, these companies tend to be larger, but they are income paying tech stocks.
And of course, you still get exposure to the you know, sex and violence side in terms of the pure growth side of tech, in terms of the digging Peter.
It's a lot of their data work just going through different companies.
What are they up to how do they work out as cash, we're in that business, what is the management team like both of us are probably still struggling for what's the best formula to understand a good management team from a bad management team and for me, it's just about consistency in terms of the group.
And there's no sort of numbers-based formula, you just got to go through the motions, time and again, I confess, we both know that the CEOs and CFOs that we meet are all heavily coached.
So they talk at very articulate, coherent, structured narrative in terms of building their investment case.
So we both of us need to try and go beneath there to understand what's going on.
So you do stuff like LinkedIn, Glassdoor, I don't know if you look at Glassdoor, so what are they actually saying?
Now, admittedly, you can say, George, I go to Glassdoor and it's like TripAdvisor for disgruntled staff kind of thing, they expend too much time in there, just close the blinds sit at home, kind of an idea.
But we will use that as well.
Remember, for a tech company, 70% of your operating costs are the people who walk in and walk out every day.
And that dynamic has been really interesting through COVID and now as we emerge out of COVID.
So what is the utilisation like?
So what kind of work rates are you getting from the people? How much do you charge them?
So really trying to understand the skills bench that these companies have, you know, paying more, you're getting better or worse, you can say George cynically, maybe you're just overpaying.
And then you have issues around attrition? Do they stay? Or do they go that those numbers have been all over the place so that you're trying to build industry models?
So for this company at this stage of its life, what should those staff-related numbers look like?
In addition to that, then you've got to find endorsements from sort of a wider community. So the industry has this NPS.
It's called Net Promoter Score in there, you'll find existing users typically rating the company and then would you say, I will recommend this to a friend and that there, you build up this scoring model, the good news in the modern world is that you can find NPS services online.
So that's not as difficult as it was. In addition to that, then you've also got other customers talking about their experiences about products, not from an NPS side, more of an experiential point of view. And there you can go from one end, you've got TripAdvisor saying X about my supplier dadada……
When you get more serious and grown up, you've got ratings agencies like G2, they do a lot in terms of the enterprise.
And again, this is for software products and then you've got the likes of Gartner Group, they will also have called peer insights.
And that they will go in there where you where it's existing customers talking about their products.
Now, you're going to say George, won't companies game those, and you say, well, every company will absolutely try to game them.
So what you're looking for is consistency over time, what moves the needle is, if you look at something like Glassdoor, I'm going to say I've got 10 years of Glassdoor on a monthly basis, looking at what staff are saying about their employer.
So be curious, as I said, LinkedIn to find people. But then the other side is shoe leather, go find out technology companies or sales machines done right.
Technology companies or sale clearly, you've got to have great product.
So they will be visible at trade shows, conferences, events, so go and go and see them.
Peter Higgins 22:48
I love that response.
I like you touched on the NPS scores there as well, which very few people talk about as well.
So you mentioned Ocado and ASOS earlier, please, can you share some of the stocks that meet your criteria?
Given that you've done that research process, you know, you're wanting smaller ones, you don't want to behemoths?
Is there any others that meet your criteria that you think and you know, what are on the look now?
Because everyone's looking at the big seven.
George O’Connor 23:18
Oh right, so yes, I mean, well done.
So yeah, what are the defining attributes is that everyone's looking at everyone's look at the Magnificent Seven.
And in terms of portfolio allocation, it's, I've got here in the Magnificent Seven, what else should I do kind of thing and the play for last year was just park it all there.
Don't be silly, and now what we've got then following on from that, is we've got that valuation gap with the US and UK, we haven't had a magnificent seven.
So that happens there.
But then the downside is that when you look into that, then on a company specific basis, suddenly it doesn't absolutely work.
Because what you find is that people in the sell side industry are constantly saying, well in the UK, we don't have any peers for company ABC.
So we will look globally. So you will find that they will come to sort of a mean revision in terms of individual companies on an individual basis.
But nonetheless, you can look into our local UK market and then find areas where the market has lost interest in and this is always a really interesting time when you find those overlooked companies.
Now I'm reminded of it was an Annabel's comment on your last podcast that this is still a difficult year in terms of her guidance, commentary, and I would absolutely support that.
So when we say we must have troughed from a valuation perspective, in terms of the UK, you still have this issue that the macro environment is still challenged.
We both saw this morning as we woke up, and we plugged into London South East and the sort of news flow there was we had the guys at Aptitude Software, FY trading update, you know, okay(ish), shares down sort of 2%, we had Martin S4C, you know, share down about 2%, but no further deterioration, which was sort of a good news, we had Kooth on the health tech side, it was broadly in line shares down around the same.
So there seems to be, and you can say, George, and remember your to profit warnings last week, but not today, but not today. But generally corporate earnings seems okay (ish).
But clearly, the mainstay of companies have not reported in terms of FY period end.
And then as we look ahead this year, we've got the whole higher for longer thing going on, but balancing that we've got spending growth in terms of the tech sector.
So we've got a little pullback there, its relationship with our companies and with valuation is difficult. Is not straight line, it's more directional.
But you could say, well, that's starting to get better. Clearly, from the geo side, we've got contagion from Gaza, we've all got this concern in terms of Taiwan.
So you'd say not an amazingly superb year in terms of how it's stacking up. And then of course, we've got the whole elections thing as well, that we're fretting about.
But if you sort of park all those and say generally it's getting a little bit better, generally valuations seem to have troughed, indeed sort of incrementally, sort of January on December, those numbers have nudged a little bit better, not dramatically.
So and clearly, what we're looking for is a positive turn in terms of sentiment, but sort of generally done it looks a bit better.
Now I should be dipping in kind of thing and you can look at areas I was talking about staffing earlier, you can look at areas like the IT professional services side of the market, people like I don't know, let's say Kainos and TPx as you look in terms of the UK market.
But what we've seen as India has reported, so the HDL of this world, we started to see the KPIs turn for the better there now, absolutely revenue is still drifting down.
But you know, we all know that already. That's all reflected in in terms of forecasts, but they're getting better utilisation for the staff, they've got less attrition.
They've got revenue drivers from Gen AI, which is at the moment from a market perspective, if you say, how do I buy exposure to Gen AI buying a video, that's actually, if we look at that same answer from a practitioner, he'll say, well, so you've got the chip part.
But that doesn't mean I can actually get any practical use case and typically, what you'll find is that they will bring in a professional services company, put a little group together here, it'll start off in a very small scrum little test environment.
And then if people can see a bigger ROI, then they will sort of develop the product into a line of business at Company ABC.
So professional services companies, although they're not developing the underlying technologies, and architectures are early winners in new cycles, just because a customer is CIO, it Chief Information Officers, I don't know what I'm doing with this, let me bring in some people who do.
So what we see and we saw this through H2 last year, is that the professional services companies skilled are in order to learn about the technology and create use cases.
And this year, they stand a really good chance in terms of gaining revenue out of it.
So I would be looking for that area, which in terms of the companies they've been utterly sold down through sort of year 23 and into 24.
There was a little wrinkle in this happy scenario. We also have a UK election this year, and typically spend public sector IT spend just goes into a little bit of a moratorium around there.
And so you could find some sort of generally cautious statements, not now, but into sort of H2, when they're looking at the short term outlook, especially so if there's a regime change, say, you know, more deeper change might occur there.
And we've seen this in prior regime in terms of government changes.
The other one I'd look for, I mentioned it briefly is on the IoT side.
AIM is home to a number of really interesting small little IoT companies and usually the guys at Microline are not sort of a transport company, but we've got a whole group of them they were absolutely forgotten about last year, as it was Gen AI nothing kind of thing, but very solid use cases in lovely customer attraction and some great technology solutions.
So you could find those guys getting more airtime here as well, if we look in on the application side of life, that strong pull there from the US side, so valuations there remain high.
And remember, think of sort of sales side, creating my investment case, I'm always looking at the peers. So you'll find that group are more expensive than the next side comes on the infrastructure side, the likes, if you know ComputerCenta or SoftCat or Bytes, they all struggled last year.
Sorry, that's unfair.
Operationally, there were issues last year in terms of the decline of PC volumes, but that industry now sees a turn in terms of 24, they did really well, from a TSR total shareholder return perspective, but structurally, these are cheap shares.
And you could say, you know, improving dynamics, they do well, plus, those companies tend to be income focused.
So they will, I believe, do well in these uncertain times. If we go back to tech in sort of 2003, 4, 5, 6 what investors wanted then wasn't growth tech, or was income tech.
But it was income tech that had growth attributes, the ability to get into new adjacencies that that kind of thing, but importantly, to generate and distribute cash, I feel as I've got Gervais, Williams in the back of my brain from your last one, this is what we want.
And I wholeheartedly and those companies could have a good year as well this year, and that they're sort of cheap in the in the scheme of things but new operation momentum creeping in.
Peter Higgins 32:34
Brilliant, love that thorough response, thank you so much for that reply, George.
Now, I'm going to switch things up a little bit and ask you some personal questions regarding your own personal investing. If I may be so bold regarding your own investing strategy, and your allocation, I don't want to make the assumption that you're just purely tech, tech, tech, with all your investments.
So please share with us where you invest, how do you invest?
And also a lumpy investor, long-term investor, proactive investor or are you fine selecting Buffett investor? What sort of investor are you?
George O’Connor 33:09
Thank you very much. I am a gross, gross guy, I have to bring the day job home with me and say that's who I am, for better or for ill.
So you will say George, that means you've had two really bad years in a row.
And this year has also started off not particularly well.
So yes, that's what I am, scratch me and that's what you'll find one of the opportunities coming out of the investment banking world is that you are now freer in terms of what you can invest in from your own account, as opposed to buying funds.
So absolutely looking forward to that, I believe in the lifecycle model.
So I am looking for the next generation of new, but also this other time, you mentioned Buffett, so I'm going to throw it back to you Peter and say, look, it's your fault, but to buy when others are fearful, is something that I hold dear to and then absolutely to, to hold on to them.
Because it's not in a straight line, you'll say, George, it is in your financial model.
But business doesn't operate in a straight line.
So to have them in hold on to them and appreciate at the bottom. That's when you make the greatest gains in terms of the long-term.
Peter Higgins 34:34
Absolutely and I think the beauty of what you just said there is that people put a lot of importance on last year's returns or two years returns, but you've been investing now for 20 plus years, it's about decade returns, and what your potential retirement plans are or your family plans are.
And your total returns over 25, 35, 40 years is what matters.
Peter Higgins 34:57
That's right.
But also Peter, what we mustn't forget is to love a profit warning.
Sometimes you can get great companies remember business doesn't move in a straight line, and they have a profit warning that the shares are down 40%.
And you think wow, so do I understand why this profit warning occurred? What we're seeing is that the hot money has drifted out of the share.
Could this be a really nice entry point. So there's a number of shares that you'd really like you'd love them to have a profit warnings got to think this could be one of those.
And then you can buy them at a great price, again, it goes back to Buffett but you know, to get great companies at great prices is difficult.
But sometimes a profits warning will give you that that wonderful opportunity.
Peter Higgins 35:47
Buy when others are fearful, exactly.
Now you touched on it a little bit there George opportunities to buy, buy and when others are fearful.
What about the potential triggers for you in your own personal portfolio?
You bought this stock, you do all the research, your plan was to hold it long-term, what could be the caveats where you go actually, this whole research of mine has completely been turned on its head I have to exit at this stage now.
George O’Connor 36:16
Right, so that will be where you no longer share the fundamental view with the management team.
I think this is the market that they should be going remember this difficulty with a management team sniff test, it's just about insistency.
So if they change track kind of thing do something else.
The other one is M&A. And I know you're keen to talk about, but M&A can get them into new areas, it can get them into scary new areas that maybe they shouldn't be in.
So it could be that when you have a disagreement about where you think they should be going at where they are taking their business.
Peter Higgins 37:01
BrilIiant, I mean, you touched on it there style drift, I think is what you're referring to, when computers move, move away from where they ultimately should be focusing on.
George O’Connor 37:10
Yeah and at the same time, what we do love is companies that are able to exploit adjacencies.
So for example, you know, I mentioned Computacenter earlier, amazing in terms of adjacencies from what looks like a cooker cutter model isn't at all I remember was it 18 months ago, as I usually do reading in The Times of India, and the local Computacenter manager was giving a presentation on the opening of a new building a new building could cater for 5,000 FTEs it's like, well, they're nowhere in India what on earth is going on?
Then you think wow, amazing, go for it.
So it could look like adventurism on one side, but it makes great business sense for them, enables them to compete not in India but in terms of the UK where they're competing against the likes of say, you know, with Pro or Infia you know, great, great thinking, absolutely go for it.
No, I'm not against adjacencies if you can see the underlying rationale for it when they're offered eventually.
Peter Higgins 38:24
Brilliant, I really love that response now, not George with regards to markets but a quote here now the broker Peel Hunt and recently warned that it'll go back to December now that the relentless pace of de-equitisation driven by a depressed UK stock market valuations will likely continue unless action is taken and impacts on being quickly now low valuations have been impacting the markets for quite a while and we see acquirers coming, left, right and centre, acquiring our beloved companies, what immediate actions are needed to address the current issues facing UK capital markets, in your view?
George O’Connor 39:05
Very good. I saw the piece actually, that was by Charles Hall at Peel Hunt and that was a great piece.
And Charlie has loads of insightful, should be your next podcast, thinking in terms of what do we do next.
And both of us, we both logged in to London South East this morning and gone through the news.
And of course, one of the bits of news was Smarttech.
And that was a proposed acquisition by private equity.
And there's been an awful lot of that private equity, sorry, it's not fair, just private, because there's also trade acquisitions as well.
But the underlying formula is that everyone will pay about a 50% premium to the undisturbed price.
And in fairness, that's what Smarttech announced this morning and said board would be minded, if it came to, to recommend it as an offer would be about 90p shares, sort of 60p, I can see that makes sense.
And that's why they would do it shares are only up at 23%, which is a little bit annoying, because that acquisition will go through.
So there's somebody leaving money on the table, suggesting that maybe the thinking is that the acquisition won't go through.
But I mean, we're all followers of bird in the hand, if somebody's giving you money, you'd probably take it, and then deploy it elsewhere.
If you're on the market, you're effectively for sale every day, the best defence about it is get share prices up.
Now you can say if this was America, you'd have a whole structure of poison pills, which would kick in.
And then of course, you'd also have another regulatory environment on top of that as well, which make it more difficult.
But the UK model for good or ill is to let these happen.
Now, at the same time, the CMA Competition and Markets, I've never seen them so aggressive as they've been in the past few years.
So they are trying on their new spurs.
But for me, the most important thing is to get the share price get some momentum in terms of share prices for management teams, to actively court their investors.
So investors don't think hang on the bird in the hand isn't any good, because I know this company can deliver X in an 18, month, 12, month, 18 month 24 month period.
So I'm actually more comfortable, because I can see the upside here, more so than going down the regulatory world saying no, this is ours.
I think it's a strength of the UK that we are so open in terms of our companies and where ownership lies, then should we say to institutional investors and retail investors no vote against it, but by all means, said but then make it more attractive to hold on to those shares.
And that's really by the management team saying this is who we are, this is where we're going. And the more expensive you make it as in the share price goes up, the harder it is then for the buyer to justify the 50% premium that they will pop on that share price.
The only nuance to this is that what we find in terms of buyer type is that private equity will pay about half what a trade buyer will pay for the for the underlying assets.
So in that sense, you say well, your message for companies is look, if you're on the market, because you want to be acquired, then court the trade, not private equity because you will do a better job there.
For your shareholders, now, at the same time, a number of management teams, you know, they will also go through a lifecycle.
And tech has been a great industry for baby boomers who now want to retire. So you would say for them, you know, it just forms part of it.
And then you'd say, well, in that case, then it's up to boards to ensure you've got really good succession planning.
So you've got a next generation of CX O-staff who are really up for it.
So as the baby boomers retire out, we've got a team who really wants to drive it forward. And they will have the confidence of shareholders in order to achieve that. So look to succession planning as a way of stopping willing sellers.
The other side is, if we go back to the tech cycle, we do have an underlying product story.
So some products mature, they go X gross, that's been one of the lessons as we've looked through our, our ARR tables for the last two quarters now.
So in that sense, you want a team to reinvest in terms of the product, make it fit for purpose, you know, have the Gen AI offer kind of a thing, and drive fresh growth, because that create energies in companies, which then feeds through but then the other side is, I don't know what to do anymore.
You know, then for some companies, you'd say, well, it's correct that you found a new buyer. And, you know, in technology, you have companies that develop features. And then these features can become product companies.
But in time, these features will actually be better off if they're subsumed as part of a larger offer, you know, MicroFocus being taken out as being one of the best illustrations of that.
So you can say, in that sense, it's a fairly normal natural path there. And all you should do is try and get the best price that you that you possibly can.
And number of companies come to London come to the market in order to raise their profile, because they just want to get acquired, why stop them? I've worked with a number of companies over the years And that was their game plan.
And for them, the best thing to do was get the share price up, get lots of people talking, create lots of buzz around the show, and then investors then gain and benefit, what we really need to do is not just get share price up, but make London more attractive in terms of getting new companies to list in here, because that's the other side of that story.
It's companies exiting, but then not enough companies joining the exchange.
Peter Higgins 45:30
Brilliant, I love that reply and that you've covered all those points there George, I wanted to just go back a little bit if I May regarding the private equity side.
And some of the stats that I've read recently the saying that private equity firms are currently sitting on $2.5 trillion in excess off.
Now, that seems to me to be leaning towards the fact that a lot of dry powder is still sitting there. So the problem we've got or the issue we could have, is that even more UK listed FTSE AIM companies are acquired, how do we reduce this?
And how do we increase the potential of these companies actually saying, as you just said, they're, you know, CEOs or CFOs going up, we're not selling, we want to we want to be growing this company for the next 5-10 years.
You know, some of them are introducing buybacks, you know, to try and increase the value of the shares.
But that doesn't seem to be enough going on and my concern, and you're working in the tech sector, is that we may not have the long-term of a meaningful listed tech sector.
George O’Connor 46:32
So first off the UK is a hotbed of startups.
So there's no shortage in terms of companies.
So that's a great start, in addition, we've got our unlisted, and we've got some amazing software engineers creating global products.
And we've got companies who are themselves setting themselves up in order to be global champions.
So we've got tech economy in the UK, which for me, has never been healthier.
In addition, if we look at hires, in terms of the buyers of technology, never before has that constituency of people said, yes, I will buy off, you know, no name or very poor brand name, UK companies, you know, and I work at DeLorean kind of thing, when I should only be buying from IBM, that sort of it.
So this is the UK is an absolutely vibrant, exciting, dynamic market.
And what we need to do with the companies is get them more ambitious, so don't sell out at the first opportunity stay, grow and develop.
But at the same time, I've talked to so many sort of CEOs, and they said, George, you know, I had never had a house I was able to sell out and buy a house is not the most amazing thing.
And then others then will say afterwards, yeah, I bought a house, in fact, about a couple of houses.
But now I'm a little bit bored. So I'm on to my next startup. So you will see that dynamic as well. In fairness to Charlie Hall and the guys at Peel Hunt.
They're also sort of arguing the case that the UK needs to be a better environment in order to list a company.
And we need to look better relative to other exchanges and other venues. I'm a big supporter of that.
But for you, Peter and for all of your subscribers, an IPO is about buying and selling new shares a key element has to be to go to the buyers of these shares and say, well, what would make it more attractive for you to invest in IPOs.
And at the moment, my concern is that all of the narrative and the proposed legislative changes are all about making it easier for companies to list but not easier for investors or of all categories to buy new shares, you are correct.
There's plenty of dry powder around and plenty of institutional investors say, I'd love to buy another IPO, give me some great IPOs. And then they're presented with CAM payments kind of thing.
So we have to be a lot smarter in terms of the community of preparing companies.
And then it's not just getting on the market. It's what happens next, in order to drive shareholder value, because if you make money once, you will press the rewind button and say, let me do that and buy another one.
Absolutely and I think that the investor community tends to be forgotten about in all of these discussions on how to make London a more and more attractive place, initiatives, which I absolutely agree and support with. But I think there's a there's a big element, which isn't really being talked to rant over Peter.
Peter Higgins 49:38
No, I love that response George, I love that response.
And that's why that's why I stopped you there to get you to get you to come out, because I know you're full hearted in your views regarding what can be done for the markets and your champion for better markets, you know, and making it more more appealing for investors, you know, young and old.
So that's why I've got you on the show to answer these questions.
Now I'm conscious of the time we've got on left for this, George.
So I want to just go back a little bit if I may, and go back to that cohort, The Magnificent Seven cohort, Microsoft, Amazon, Meta, Apple, Alphabet, Nvidia and Tesla, you have you've have a slightly different view about that particular cohort.
So I'm going to ask you these two questions in parallel.
Which ones are you positive on regarding that call? Or which ones are you negative on regarding 2024 out of that cohort?
George O’Connor 50:37
Okay. Okay. Very good.
So I think the market will want them all as we go deeper through 2027.
My real hope is that the market looks beyond the Magnificent Seven, and says, wow, what are the other companies that can gain from this, but at the moment, were blinkered.
Now the other side of this, Peter is that if you're looking at something like Nvidia, the numbers are just awesome.
Their ability to blow forecasts out of the water, their ability, and this came through on the last quarter to generate cash is phenomenal. And success, as we both know begets success.
So there is real dynamism in there.
Absolutely. So so you'd say, well, I'm going to say that they have an 80% share of AI GPUs.
I mean, it's just ridiculous. I know Sam Altman has been talking about raising funds with Taiwan in order to create disruptor in this market, because at the moment, they're absolutely in the driving seat. The numbers are phenomenal that raising cash.
And that gets us then into what they will all do next, which is really what they've been doing. And that's making acquisitions.
So buying up their potential competitors, before their company's potential is really hit their stride. So unlike last prior technology cycles, I don't know if you know, sort of Netscape who, once upon a time, a big name digital equipment, who wants to punch a big name leaders in prior cycles, which didn't make it beyond the initial rush, the problem with the seven is that they're being very smart in terms of where is this end market going to go?
My hope it is that the investment community looks beyond them, and saying well, we've got some great companies who are also in a moving through that market at the moment we’re blinkered and herd mentality is taking over.
Now that said, given the gains, people will naturally want to pocket winnings, that is an absolute corrective approach to take. And on that there will be naysayers as well. So the whole groundswell that we saw in 23, that will need to be supported by numbers coming through this year. But if Nvidia’s last print has anything to go by it, wow, those numbers are amazing.
Peter Higgins 53:17
Indeed, I did something on one of my other podcasts, the Twin Pete’s podcasts, and a bit of research I found going back to January 2010.
Is that right, yeah? 2010 £10,000 invested in Nvidia was now worth after 14 years, 1.358 million, staggering.
So long-term investing can work.
Now you touched on something really important as with all the stuff you've said already, George it's important for all investors, institutional otherwise, to be careful the potential risk of overpaying.
How do we ensure that as investors we don't overpay because as you said, Nvidia just carries on smashing 80% up 50% regarding revenue.
But how do you ensure we got some stocks you don't overpay?
George O’Connor 54:10
So classic analyst answer is just what's the ratio? What is the valuation ratio? Where does it sit relative to other companies?
The issue with the Magnificent Seven is that I can find more expensive tech stocks without a huge amount of difficulty.
In addition to that they have a growth profile attached to them as well.
So you won't look at the near number, you'll look at the out numbers, and they're shooting great growth out there as well. And then the other side of it is that we appreciate we're only at the start of a cycle here.
So that will further depress those multiples that at the moment look like a white-knuckle ride.
The argument is built on the ratios valuation ratio, excuse me, but not on this year.
But look at the out years and then the other thing is that people don't want to get sucked into a rally, you naturally don't want to get sucked into a rally.
So now because we're looking for a pause point, I mean, you'd love to say, pick it up on the profit warning Peter here. But you're probably unlikely to walk into one of those short-term.
Peter Higgins 55:26
Brilliant love that response, now conscious of time. I've got two more questions for you, George, I've got a naughty question.
And a really good question to end with should the fund wealth Asset Management and Research Investment Industry have any concerns about the potential threat to businesses, their businesses due to the application of AI and generative AI?
George O’Connor 55:48
So yes, I sat I don't know if you're getting my research.
But about a year ago, I wrote a piece calling I've just lost my job to Gen AI. I remember it well.
And it was partly tongue in cheek.
But finally, what I said earlier was a lot of my job, he is sort of fairly repetitive data entry kind of stuff.
For me, it's important to be close to the numbers.
So it's a pleasure, it lengthens the workday is a pleasure to if you get too far away from the numbers, then you've lost my view, you've lost it, but clearly, you can still talk. So that is a concern.
So absolutely, that's a concern.
But it's a concern across the knowledge worker world, and particularly so those of us in the West, it's bigger in mature economies, it's a big risk there.
So absolutely, I go to copilot.
It's the person but it's the app working beside me making me more productive.
But then you can say George will co-pilot now.
But you know, believe me, he's after your job at some stage kind of kind of an idea.
So Gen AI creates efficiency gains. So we've mentioned the software industry earlier, they're getting 40% productivity improvements now, not across the board.
But that's the kind of results so you'd say what a company going to do, it's going to reinvest that in order to create a next generation of amazing things be more productive, lower prices to its consumers, or it's going to say, well hang on, then I can just reduce the cost base by that amount.
So if we look at some industries, content creation, that's already happening.
Peter Higgins 57:30
Thank you so much for that was response to us, I really appreciate it.
Now, I've got a final question for you here George, given your vast experiences of more than 25 years in the investment industry, the multiple awards you've won, plus your five wonderful individual young people, adults, some of them that you've parented, and co-parented should I say, given all of that, what are you most proud of George?
George O’Connor 57:58
Oh, that's a hard one Peter and I'm not sure I can answer it off the cuff.
I've done a number of transactions with companies, you've raised them money, and then that money then has been deployed into new products.
And the because of that the company's numbers then have materially improved such a rush for me during the IPO of a company where it's a success, and it generates funds for you know, new shareholders. I don't know if you remember Focusrite.
Back in the day, that was such a pleasing thing to do and it's still doing really well.
So that's such a huge positive but clearly, questions like that are geared to say I'm so proud of my children, because if there is any legacy, it's those five poor unfortunates.
Peter Higgins 59:00
Brilliant. I love that response. George, thank you ever so much, ladies and gents, that was George O'Connor, the multi-award winning information technology and software analyst.
Thank you so much for sharing your insights with us on the Investing Matters Podcast today George, always a pleasure speaking with you, thank you ever so much, take care and god bless you, Sir.
George O’Connor 59:22
Thank you, Peter. Much appreciated best to you. Bye bye.
London South East 59:28
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