What Makes Fintech Such an Appealing Area of Investment?
Yesterday Ryan put a valid question to you. Is it too late to buy Afterpay Touch Group Ltd [ASX:APT]?
The stock is now up around 800% since the mid-2017 merger between Afterpay and Touchcorp.
Afterpay has now become a term of its own. As Ryan pointed out to ‘buy now and pay later’ is to ‘Afterpay’ something. It’s now like taking a Panadol or using the Hoover.
The reality is taking a Panadol is often just another generic brand of paracetamol. And using the Hoover is just using a vacuum. To have a brand name become synonymous in that fashion says a lot about the brand.
Afterpay is the posterchild for the recent spate of ‘fintech’ (financial technology) stocks that have been smashing the markets to bits. Meanwhile the big end of ‘tech town’ is struggling with volatility and ongoing geopolitical uncertainty. Yet these new crop of ‘unicorns’ have been delivering double and triple digit returns for investors.
But the real question is why?
What makes fintech such an appealing area of investment? After all, many of these stock stars don’t make profits, burn through cash and are trading at eye-watering multiples.
Well part of it is investor appetite for risk. The eternal hunt for returns in volatile markets can often lead investors into riskier assets. You don’t really need to look much further than cryptocurrency to see that in full view.
But another big part of this ‘fintech boom’ is thanks to the enabling technology.
Trillions in just 50 years
You might think this fintech boom has a lot to do with incumbent banks. You might think that these fintech companies are offering the services that traditional banks don’t provide anymore, they’re catering to the people.
Part of that’s true. But what Afterpay and alike are doing isn’t all that new. To ‘buy now and pay later’ has been a staple of Aussie retail for decades. What is different this time around is how they deliver their services.
What makes them so user-friendly? How are they able to implement their services in today’s fast paced world of e-commerce? What drives Millennials and tech-savvy consumers to their services?
It’s the technology behind it. The technology of the devices we all use. The existence of e-commerce. All these modern tech marvels converge to enable companies like Afterpay to carve out a massive market share.
But it all really boils back to one very specific, 50-year-old technology, than means companies like Afterpay even exist.
And it’s not just Afterpay that is a beneficiary of this technology. Every ‘tech’ company in the world worth its salt owes this tiny tech a great deal of gratitude.
The same goes for the huge US-based IPOs we’ve seen over the last year. Spotify Technology SA [NASDAQ:SPOT] (US$26.97 billion), Lyft Inc [NASDAQ:LYFT] (US$18.39 billion), Uber Technologies Inc [NASDAQ:UBER] (US$72.52 billion), Slack Technologies Inc [NASDAQ:WORK] (US$18.17 billion), Zoom Video Communications Inc [NASDAQ:ZM] (US$25.02 billion) and Pinterest Inc [NASDAQ:PINS] (US$14.11 billion) are all IPOs that have started their public trading lives with tens of billions of dollars.
Combined, those six alone equate to more than US$175 billion in wealth creation from scratch.
A decade ago most of them didn’t even exist. A decade ago bitcoin and cryptocurrency didn’t exist either.
Add the current ‘market cap’ of the entire cryptocurrency market (around US$370 billion) with those new giants of tech and you’re looking at a grand total around the US$545 billion mark.
That’s more than half a trillion dollars in wealth created in under a decade.
But again I come back to the point, none of them would exist if not for a tiny tech developed over a few years back in 1969.
We’re living, right now, in the middle of one of the most glorious periods of wealth creation that has ever existed on Earth. Trillions in wealth, all off the back of just one, tiny little piece of technology from the late 60s.
What many investors neglect to remember is that all this modern wealth is easily traced back to one point in time. Trillions in wealth creation over 50 years thanks to one world-changing development. One tiny little technology that at first people didn’t really see much point in.
A little piece of metal no bigger than a thumbnail.
We’re on the cusp of a technology breakthrough…
According to PC Mag’s ‘The Birth of the Microprocessor’:
‘The Intel 4004 is considered the first microprocessor—in other words, the first general-purpose computer on a chip.’
Founded in 1968 by Robert Noyce and Gordon Moore, Intel was a fledgling company. But they had been working since 1968 on the 4004 and it didn’t hit the market until 1971. They also began working on the 8008, an 8-bit microprocessor in 1969 and it hit the shelves in 1972.
PC Mag’s essay continues to say:
‘“People had talked about a computer on a chip for years,” Intel co-founder Gordon Moore said, “but it was always out there in the future. What Ted [Hoff] saw was that, with the complexity with which we were already working, you could actually make an integrated circuit like that now. That was the real conceptual breakthrough.”’
And yes, that is Gordon Moore, as in ‘Moore’s Law’. Moore developed the theory that the number of transistors on a microchip doubles every two years while the cost of computing halves.
Moore’s Law has been a fundamental theory in the development of computing and microprocessors over the last 50 years. And it’s thanks to the developments in microprocessor technology that we even have computers.
And thanks to computers we have networks, intranets…the internet. And it’s thanks to the internet that we have mobile communications and the ability to create and connect applications (apps) on these mobile devices. And thanks to the internet, networks and computing, we are able to have disruptive breakthroughs like bitcoin and other cryptocurrencies.
All those multibillion-dollar companies and all those cryptocurrencies come down to the birth of the microprocessor. Down to the early days of Intel, the 4004, the 8008 developments from there, innovation, competition and technological advances over a 50-year period.
But Moore was also bang on the money when he said people always thought the technology was ‘out there in the future’. That is, they thought that until it was there right in front of their faces.
Most people don’t really appreciate the technologies of tomorrow and how close they are to us today. They always seem to be, ‘out there in the future’. And that’s why most investors are late to the party when it comes to technology mega-trends like the birth of the microprocessor.
The good news is, however, we’re on the cusp of a technology breakthrough that’s set to be bigger, in fact ‘doubly exponential’, compared to what Moore’s Law has delivered. We could be looking at a tech boom that creates more wealth than we’ve seen over the last 50 years and does it in as little as 10.
It’s the start of a new tech boom. One that is set to alter the course of human history. If you think the 4004 microprocessor was important to the world we live in today…think again.
In tomorrow’s Money Morning, I’m going to reveal to you exactly what this tech is and why it could kick off of another ‘50-year tech boom’ in the space of just the next 10 years. A moment in time that I think will be as significant as Noyce and Moore’s 4004 microprocessor, but create even more wealth…
Editor, Money Morning
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