Better Businesses Have Higher Near-Term Valuations

To Our Investors and Friends,

The S&P 500 increased 7.0% during the month of August, continuing its technology-driven march higher. Oil increased 5.8% to end the month at over $42 a barrel. The 10-year rallied during the month to 72 bps, a 17 bp increase, while the spread between the 2- and 10-year widened to 58 bps. Growth’s dominance continued. The Russell 1000 Growth increased 10.3% in the month, helped by strong performance from mega-cap technology companies. The Russell 1000 Value gained 4.1%. In small caps, the differential between growth and value was far more modest as the Russell 2000 Growth expanded 5.9% and the Russell 2000 Value gained 5.4%.

In this investment letter, we attempt to answer the simple question: why is the market willing to pay more for leading technology companies than leading industrial companies? We decided to compare the top ten S&P 500 technology companies by market cap to the top ten S&P 500 industrial companies. In short, the market is placing a premium on near-term valuations for faster growing, more profitable businesses that are earlier in their lifecycle. In fact, the valuation premium of technology companies is double that of industrial companies, comparing 2021 estimated consensus earnings multiples (46x for tech and 22x for industrials).

A simple examination of the fundamentals of these two groups helps explain the premium tech is receiving. Over the last 12 years, this technology cohort has grown cumulative revenue by over 1000% vs a mere 21% for the industrial cohort over the same time frame. This growth differential is entirely tied to maturity of business and global opportunity in front of them…the average tech company cohort is 28 years old addressing a global market, while the industrial cohort is 122 years old and focused on a smaller geographic footprint.

As can be seen in the chart below, the tech cohort is also far more profitable, generating 66% gross margins compared to the 32% gross margins offered by the industrial cohort. Spending on R&D and sales narrow tech operating margins to 25%, which are still higher than the mature industrial operating margins averaging 17%. This profitability advantage can be attributed to the greater scalability of tech businesses…excluding people-intensive distribution businesses Amazon (AMZN) in tech and United Parcel Services (UPS) in industrials, the average leading technology company employs less than half the number of people needed to run the industrial companies.

Fewer people required to address a larger opportunity suggests higher profitability will come to technology companies. In fact, technology companies are expected to grow earnings at more than a 40% rate over the next five years compared to a 9% rate for the leading industrial companies. Using simple math, in five years, technology companies are projected to earn approximately 5x as much as they earn today, while industrial companies are poised to earn 1.5x more. That means in five years from now, investors are paying an estimated 8.6 times for the tech earnings stream and an estimated 14.5 times for the industrial earnings stream. The market appears to have it right... tech companies are likely more undervalued than industrials if these estimates are correct. It is the FED’s “lower for longer” interest rate policy that has forced the market to appropriately place more value further out in time...a trend we expect to continue.

We will continue to search for the very best businesses the market has to offer and look to own their shares as long as their opportunities are poised to drive the growth of their businesses. Short term, the shares often appear to be rich on near-term earnings metrics, but over time, we expect them to prove their worth.

All the Best to You,

AKW

Not Your Parents’ Tech Driven Bull Market

To Our Investors and Friends,

The S&P 500 increased 5.5% during the month of July, building on its second quarter gains. After a tremendous run from the bottom, oil increased a more modest 2.6% to end the month at just over $40 a barrel. The 10-year fell during the month to 55 bps, a 14 bp decline, while the spread between the 2- and 10-year narrowed to 34 bps. As has often been the case over many quarters, large outperformed small, and growth outperformed value. The Russell 1000 Growth increased 7.7% in the quarter, helped by strong performance from mega-cap technology companies. The Russell 1000 Value gained 4.0%, helped by both consumer staples and the utility sector. In small caps, the Russell 2000 Growth expanded 3.4% and the Russell 2000 Value grew 2.1%.

We are questioned daily as to whether this rally is Tech Bubble 2.0. We believe that unlike the tech bubble of our parents in the late 90s, the consistent rally in the technology sector is quite different and is driven by sustainable fundamentals. We think the market has entered a golden era of growth as the digital economy is becoming the mainstream economy, and the industrial economy is losing its importance as a driver of economic growth.

The modern industrial economy began with the invention of the modern internal combustible engine in 1876, followed by the invention of the automobile in 1886. Once created, it took decades for these advances to change the global economic landscape. The Federal Highway Act of 1956 established the modern US highway system that enabled the connectivity required for a robust industrial economy across the United States. For much of the last two decades, China built a similar system across their country to build out their industrial economy.

We see a parallel in the digital economy that began with the introduction of the semiconductor industry in the 1960s and the personal computer industry in the 1980s. The internet is the highway system that not only connects both smart phones and computers across the US, but across the world. This connectivity is allowing for growth arguably unlike anything we have ever seen in the history of the planet.

We decided to compare the growth trajectory of e-commerce leaders Amazon (AMZN), founded in 1994, and e-commerce tools enabler Shopify (SHOP), founded just a decade later. As can be seen in the chart below, after its first decade of growth, Amazon was able to grow their revenue at a 31% annual rate from year 10 through year 17 since founding. During this same time frame since founding (SHOP is now 17 years old), Shopify was able to grow their GMV (value of merchandise sold on sites using the Shopify e-commerce engine) at an 82% annual rate. We believe this much faster growth can be attributed to both vastly greater connectivity among devices just ten years later as well as vastly greater receptivity of consumers to participate in e-commerce.  In fact, this greater connectivity helped Amazon grow its revenue by another 10-fold over the last decade.

The technology bubble of the late 1990s was built primarily on speculation about what would come. Today’s technology driven bull market is largely based on robust fundamentals that are growing at a rate that we have never seen before. Although some stocks most likely will need to consolidate before going higher, we believe that this new bull market has a long way to go. We will continue to spend our time discovering and owning these next generation blue chip companies and enjoy the benefits of their growth as they reshape the global economy.

All the Best to You,

AKW

Welcome, Welcome, Welcome!

To Our Investors and Friends,

The S&P 500 increased 20.0% in the second quarter as the market anticipated the end of the economic and healthcare crisis driven by both massive monetary and fiscal stimulus and a decline in COVID-19 cases throughout Asia and Europe. Oil prices (WTI) rebounded a robust 92% to over $39 a barrel as signs of an economic recovery began to appear in China and other parts of the world. The 10-year was little changed from last quarter, ending 4 bps lower at 66 bps, while the spread between the 2- and 10-year ended at 50 bps. Growth stocks continued to lead the market - the Russell 1000 Growth was up 27.8% in the quarter compared to the significantly less robust 14.3% gain in the Russell 1000 Value. Small cap stocks rebounded more significantly than larger companies, but the growth-value disparity was equally wide. The Russell 2000 Growth expanded 30.6%, helped by both technology and healthcare, and the Russell 2000 Value rebounded a less robust 18.9% as the recovery in financials was one of the weakest since the market bottom in late March.

John Oliver opens his weekly show with the words “welcome, welcome, welcome!” This is an appropriate enthusiastic greeting for the Millennial Generation that has entered the stock market en masse during the last several months. Retail investors historically have shown up late to a bull market. This new group of investors uncharacteristically entered the market during a rare 30%+ sell off.

The Millennial Generation has had little exposure to equity markets since the 2009 market bottom, but according to brokerage firms, millions of younger investors have used their COVID-19 stimulus checks to open discount brokerage accounts in recent months. Robinhood, the newest discount brokerage entrant and innovator, has helped lower the barrier to entry for new investors through both the introduction of zero commissions and fractional shares to enable small investors to own companies with share prices in the hundreds or thousands of dollars per share. These first time Millennial investors are a stark contrast to what the older Baby Boomers have done during the same time frame. Some brokerage firms estimate that about a third of investors over 65 sold all their stocks during the market downdraft.

We may be witnessing a generational transition in the stock market. Given that Millennials are just entering their mid-30s and should be experiencing strong wage gains for years to come, it could provide a long tailwind to the market. In addition, a Visual Capitalist report estimates that $30 trillion dollars, the biggest wealth transfer in history, will move to Millennials over the next 30 years.  A potential generational transition may in small part explain the disparate experience of value stocks vs growth stocks. A survey collected by Morning Brew suggests that 49.7% of Millennial investments are in the technology sector, and an additional 12.1% are in the healthcare sector, versus a combined 7.6% in industrials, financials, and materials. This may help explain some of the dramatic disparity across different sectors in the market. It is hard to believe a Millennial will choose to buy such old blue chips as GE, Wells Fargo, and US Steel over new blue chips Tesla, Netflix, and Shopify.

Whether or not this new group of investors sticks around as the economy recovers, we will continue to focus on finding innovative companies that harness the power of technological change that improves people’s lives. We think that this focus on the future should continue to drive positive returns for our investors that likely will continue to exceed the returns of the S&P 500 over time.

All the Best to You,

AKW

Time to Fire Your Passive Manager

To Our Investors and Friends,

The S&P 500 increased 4.5% in May as massive monetary and fiscal stimulus continued to push the markets higher despite horrific news on both the COVID-19 and unemployment front. Oil prices (WTI) rebounded a robust 88% to over $35 a barrel as signs of an economic recovery began to appear in China and other parts of the world. The 10-year was little changed from last month, ending at 65 bps, while the spread between the 2- and 10-year ended at 49 bps. Growth stocks continued to lead the market - the Russell 1000 Growth was up 6.7% in the month compared to the more modest 3.4% gain in the Russell 1000 Value. Small cap stocks experienced an even wider disparity, likely indicating a more permanent impact of change on this part of the economy. The Russell 2000 Growth expanded 9.5%, helped by the promise of biotech to solve some of the virus issues, and the Russell 2000 Value rebounded a mere 2.9% as the poor outlook for banks suppressed returns.

We are witnessing an incredible amount of turmoil driven by both the impact of COVID-19, and protests and riots that broke out across the country since the senseless death of George Floyd on May 25th. “I can’t breathe” defines where the country is right now...the inequity among Americans is coming to the forefront and likely will accelerate change. Those that hold onto the past will be relegated to the history books, while those that embrace the future can help shape it for the better.

Over the last decade, equity market fund flows have been dominated by investors pouring their retirement dollars into passive indexes. Investors are wholeheartedly rejecting higher cost mutual funds that have not generated the higher returns required to justify their fees. This occurs at a time when we are witnessing how quickly people can change their behavior. What is not changing quickly is the components of the S&P 500. As can be seen in the chart below, the greatest danger S&P 500 index investors face is stagnation. On April 6, the S&P 500 removed Macy’s (M) from the index. On May 12th, Dexcom (DXCM) was added to the S&P 500 index.

For more information on this chart service, please visit www.williamoneil.com.

If the S&P 500 index was an active manager, it would be fired. Taking time to make changes may have made sense in the past, but this rigidity will prove quite costly in a rapidly evolving economy.

Many speculate that Tesla will be added to the S&P 500 sometime later this year or early next year. Ford and General Motors have long been part of the index. (GM was added back in after it went bankrupt during the financial crisis). Tesla stock is up over 4000% since it went public in 2010. It is no wonder that the S&P 500 has massively lagged every major Russell index over the last 20 years.

We will continue to focus on finding innovative companies that harness the power of technological change that improves people’s lives. We think that this focus on the future should continue to drive positive returns for our investors that likely will continue to exceed the returns of the S&P 500 over time.

All the Best to You,

AKW

Revisiting Nassim Taleb’s The Black Swan

To Our Investors and Friends,

The S&P 500 increased 12.7% in April as massive monetary and fiscal stimulus helped the markets rebound from the disastrous COVID-19 pandemic. Oil prices (WTI) continued to decline, down 8% to approximately $19 a barrel, as oil demand/supply remains imbalanced. The 10-year was little changed from last month, ending at 64 bps, while the spread between the 2- and 10-year ended at 44 bps. Difficult environments for both energy and financial companies helped growth’s dominance remain intact. The Russell 1000 and Russell 2000 Growth index both rebounded approximately14.8%, while the Russell 1000 Value Index increased a less robust 11.2%, and the hardest hit index, the Russell 2000 Value, recovered 12.3%.

It may be surprising to hear that COVID-19 is not a Black Swan, meaning an unexpected event that changes our perception of the world. In a recent CNBC interview, Mr. Taleb pointed out that we have had many pandemics in the past, including several since the turn of the century. Many Asian countries were well prepared for the crisis and appear to be recovering after a less severe disruption. A decade of cost cutting in the U.S. (including at the CDC itself), and outsourcing production of everything from medical equipment to drugs, left this country in an unusually vulnerable position, for which we are now paying a high price in both lives and dollars.

We believe there are a few points worth mentioning from The Black Swan. In the book, Taleb writes, “In the last 50 years, the 10 most extreme days in the financial markets represent half of the return.” With this in mind, we will resist calling a bottom in the market and missing these rare return days. It is best not to have a firm opinion on how this plays out. There are simply too many unknowns to try to guess the outcome. Along these lines, we are struck by Talab’s lesser accepted 50/1 rule, which is a more extreme version of the 80/20 rule. The 50/1 rule states that 50% of performance, economic growth, wealth, etc. is generated from a mere 1% of participants. This may explain why, as many have noted, the market value of the top 5 companies in the S&P is a rough match to the market cap of the bottom 350 companies. We believe it is a sign that our economy may be at an inflection point and is why we will continue our hunt for rare, outsized opportunities.

We believe the 50/1 rule is the best explanation for the wide disparity in fortunes of companies during this downturn. It may explain why 20%+ of the population is unemployed, and the stock market is off a mere 14% from the high. The Federal Reserve and Washington are pumping a lot of money into the economy right now to both dampen the impact of COVID-19 and strengthen financial markets. Let’s hope the end result isn’t a real Black Swan that reshapes our country to something unrecognizable. Nevertheless, we will be preparing for an uncertain future, and change in the direction of where the economy is heading.

All the Best to You,

AKW

The New Economy is Dealing with COVID-19 Better than the Old

To Our Investors and Friends,

The S&P 500 decreased 20.0% in the first quarter as the COVID-19 pandemic quickly pushed the world economy into recession. Oil prices (WTI) plummeted 66.5% to $20 a barrel as Saudi Arabia and Russia decided to meet falling demand with more supply. The 10-year collapsed 118 basis points during the quarter to end at 0.70%, while the spread between the 2- and 10-year expanded to 47 bps. Demand for treasury bonds is now only exceeded by demand for toilet paper during the current health crisis. Growth’s dominance continued even as the market plummeted. The Russell 1000 Growth fell 14.1% in the quarter, while the Russell 2000 Growth dropped a more severe 25.8%, given that smaller companies are less liquid. Value’s higher energy and financial weights caused this group to fare even worse. The Russell 1000 Value fell 26.7% and the Russell 2000 Value fell 35.7%.

We have long held the view that industrial era businesses are slowly losing share to new companies that are more technologically savvy and less capital intensive. COVID-19 will likely act as a catalyst to an acceleration in growth of the digital economy, at the expense of the brick and mortar economy. As can be seen in the chart below, it is clear that younger businesses fared far better than older ones in the first quarter. Noteworthy, are market leaders Apple, Microsoft, and Amazon (now 26 years old) powered the 26-50 year old cohort to the best performance. The over 100 cohort was helped slightly by a number of industrial era food companies benefitting from pantry hoarding, a phenomenon we believe likely ends as the crisis abates.

Looking back at the 2008-2009 financial crisis, new leadership bottomed early, and then drove the market higher with the birth of the next bull market. Now is the time for investors to adjust their portfolios and get ready to prepare for the next bull market. It will be quite volatile at times, but will be well worth it over the long haul.

All the Best to You,

AKW

Weighing the Effects of the Coronavirus on the Digital Economy

To Our Investors and Friends,

The S&P 500 fell 8.4% in February as the Coronavirus spread globally and now threatens to lead the global economy into recession. Oil prices (WTI) continued their decline from the previous month, down 13% to less than $45 a barrel as canceled air travel routes and the postponement of major conferences and events threaten to curtail oil demand. The 10-year dropped 38 basis points during the month to end at 1.13%, the lowest level ever recorded. The spread between the 2- and 10-year is 27 bps. The effective FED funds rate is 1.58 bps and again is creating an inversed yield curve, which often foretells of recession. All indexes turned sharply negative at the end of the month. The best performing major index, the Russell 1000 Growth, declined 6.8%. The Russell 2000 Growth was down a sharper 7.2%.  Financial and Energy stock declines led to much worse performance for value. Both the Russell 1000 Value and Russell 2000 Value indexes fell 9.7% for the month.

Oftentimes, a crisis can accelerate a trend or create a new one. Two hundred years ago, the eruption of Mount Tambora in Indonesia darkened the sky and led to the year without a summer in 1816, causing a worldwide famine. Without enough to feed them, horses were slaughtered by the thousands. In need of a new form of transportation, the bicycle was invented. More recently, the great recession of 2008 and 2009 forced many to abandon their expensive Starbucks cup of premium coffee in favor of the much more affordable Keurig K-Cup. During the same time, millions of newly unemployed people sought out new fortunes by creating their own businesses. The resulting explosion of entrepreneurs helped launch consumer retail software platforms such as Shopify (SHOP) and ride sharing giant Uber (UBER).

Make no mistake, the Coronavirus is a serious health concern for segments of the population. However, from a business perspective, we think it could accelerate existing trends and create new ones that will continue to advance Fourth Industrial Revolution beneficiary companies at the expense of older companies. Telecommuting and telemedicine are certainly going to see faster growth in the future as individuals are forced to try new alternatives to both work and doctor visits. Migration to the cloud likely accelerates because the data center model will have trouble dealing with this new way of working. In education, online services are being adopted as a supplement and possible replacement for in-class education. Finally, governments are likely to pick up their spending on mass communication systems to help better prepare the public for future outbreaks.  

Our search continues for transformational businesses…those companies that offer superior solutions to what currently exists. Such companies generally experience rapid revenue growth that eventually leads to even faster earnings growth, although oftentimes later in the company’s life cycle. There is frequently an unanticipated accelerant to these businesses that allow them to emerge bigger and better than previously thought possible. We hope that the coronavirus is not nearly as bad as currently feared, but nevertheless will use this time for more intensive discovery.

All the Best to You,

AKW

Price Momentum Built with Straw or Brick

To Our Investors and Friends,

The S&P 500 fell .2% in January as a combination of Corona Virus and an impeachment trial spooked the market at the end of the month. Oil prices (WTI) plummeted almost 16% to $52 a barrel as concerns over a slowdown in China dominated the commodity. The 10-year dropped 37 basis points during the quarter to end at 1.51%, a level not seen since last fall. The spread between the 2- and 10-year fell to 18 bps. Large companies performed far better than small. The Russell 1000 Growth led the market, up 2.24% driven by strong tech earnings. This far exceeded the 2.15% decline in the Russell 1000 Value, as financials and industrials gave back some gains earned at the end of last year. In the small cap space, the Russell 2000 Growth fell 1.1% and the Russell 2000 Value dropped 5.4%.

Earnings season has begun and is largely revealing continued strong growth for many new sectors of the economy, led by technology companies such as Microsoft (MSFT) and Apple (AAPL), and continued weakening trends in many industrials – most recently Boeing (BA) and Caterpillar (CAT). Not surprisingly, the stock market is again reflecting these underlying trends.

Over the last decade, the number of quantitative strategies available to investors has exploded. Many of them rely on price momentum as a primary factor in their algorithms from which they base their buy and sell decisions. We are seeing early in 2020 that not all price momentum is the same. In fact, speculative price momentum, in which market price is anticipating a change in trends, drove the performance of industrials and financials in the last few months of 2019. This is price momentum using a fragile material such as straw as its foundation…. quick to construct, and equally quick to fall apart. Price momentum built on fundamentals is using brick as its foundation…it often takes longer to build, but is far more durable as market fears materialize. In fact, Robert Novy-Marx’s paper Fundamentally, Momentum is Fundamental Momentum (https://www.nber.org/papers/w20984) points out that earnings momentum is the primary determinant of stock momentum, and that price momentum strategies absent of earnings momentum give investors high volatility without better performance.

Our search continues for transformational businesses…those companies that offer superior solutions to what currently exists. Such companies generally experience rapid revenue growth that eventually leads to even faster earnings growth, although oftentimes later in the company’s life cycle. Next generation businesses are using a customer-centric approach that leads to predictable, ongoing customer relationships that produce steady revenue and earnings growth over a span of years. In the end, these strong customer relationships are the bricks used to build predicable revenue and earnings streams that lead to higher stock prices over time.

All the Best to You,

AKW

A Decade of Technology Leadership That is Here to Stay

To Our Investors and Friends,

The S&P 500 increased 8.5% in the fourth quarter as concerns surrounding the potential for an economic slowdown dissipated during the quarter. Oil prices (WTI) increased almost 13% to $61 a barrel as economic growth around the world picked up modestly. The 10-year increased 24 basis points during the quarter to end at 1.92%, while the spread between the 2- and 10-year expanded to 34 bps, the widest seen since the beginning of the year. Small caps led the market in the final quarter of the year. For the quarter, the Russell 2000 Growth finished up 11.4%, modestly beating the Russell 1000 Growth up 10.6%. On the value front, the Russell 2000 Value expanded by 8.5% and the Russell 1000 Value returned 7.4%.

Many market participants have spent a lot of time and effort arguing that value should begin to beat growth on a sustained basis. We don’t share this view because we think the difference in performance between the different styles is driven by real, sustainable economic change.

Over the last decade, the Russell 1000 Growth Index increased by 312%, driven by a handful of technology companies now commonly referred to as FAANG – Facebook, Amazon, Apple, Netflix, and Google (now Alphabet) – which all experienced much faster stock appreciation than the index (led by NFLX up over 4000%). The Russell 1000 Value increased a more modest 205%, and the S&P was up 190%. Customer-centric companies are using the tools of the fourth industrial revolution to create better businesses than those they are replacing. This trend is set to continue and is being bolstered by an emerging consumer that is seeking advanced technology to simplify their lives. This technology has an added benefit of keeping inflation at bay as sharing services reduce demand for the asset heavy products produced by the previous industrial revolutions. The chart below highlights how these younger companies have grown materially faster in both revenue and stock appreciation than their older peers.

Revenue and stock appreciation of the top 250 S&P 500 companies over 10 years

We don’t expect FAANG to dominate the indexes’ performance over the next decade but believe that a new crop of technology leaders will follow in the footsteps of these established companies. New tools such as artificial intelligence, nanotechnology, and big data analytics are being used to reshape our world. Our effort is focused on identifying and owning these companies that we believe will drive returns over the Roaring ‘20s.

All the Best to You,

AKW

The Challenges that Come with Being Disrupted

To Our Investors and Friends,

The S&P 500 increased 3.4% in the month of November as concerns of an economic slowdown dissipated, and investors began to focus on a stronger 2020. Oil prices (WTI) increased almost 2% to $55 a barrel. The 10-year increased modestly to 1.78%, while the spread between the 2 and 10-year remained at a more recent norm of 17 bps. The Russell 2000 Growth took the lead this month, increasing 5.9%. The Russell 1000 Growth finished up 4.4%. The Russell 1000 Value expanded by 3.1% and the Russell 2000 Value returned 2.3%. 

Older companies are being forced to change their business models to adjust to their newer, cooler competitors. Disruption usually impacts businesses when a cheaper, simpler, and faster model is introduced to the marketplace, challenging the status quo. The challenges became apparent for two companies this month as they introduced their answer to these disruptive forces. Disney (DIS) introduced the Disney+ service to compete with Netflix (NFLX), and Ford (F) introduced the Mustang Mach E, an all-electric version of their Mustang Muscle Car, to compete with Tesla (TSLA).

Bob Iger once said that if someone is going to “eat their digital lunch, it might as well be them.” Disney+ was launched this month as a response to Netflix’s popular VOD service. The new service has a similar layout and functionality with some obvious shortfalls. The content consists of a library of animated and live-action films and television shows from Disney’s more than 90 years in the entertainment business. Still, the content is just a fraction of Netflix’s offering, and a large amount of it appears dated and irrelevant to today’s global consumer. The most relevant content, Disney’s most recent releases, are not on the service until they complete their DVD windows for consumer purchase at retail. And here is where the problem begins. In the end, Disney must compete with itself in order to move forward. Old content monetization methods such as movies at theaters and for purchase or rent options are all under fire, without which Disney is a much smaller and less profitable company. I don’t know what impact Disney+’s service will have on Netflix, if any, but I do know that it will be very harmful to Disney’s legacy business as consumers realize they no longer need to buy the same content multiple times.

Ford’s Mustang 2021 Mach E (Tesla purposely doesn’t have model years) will be available for purchase in about a year. It has a familiar touchscreen console in the middle of the dash, and is similar to the Tesla in both range and acceleration. Unlike the Tesla, it produces a sound reminiscent of a roaring engine. What is missing, however, is wireless updates and autonomous features that really put the Tesla in a class by itself. The biggest challenge Ford will face is that the dealer network, which serves as Ford’s entire distribution channel, is going to be left wanting. Electric vehicles do not require oil changes and require minimal maintenance. Dealers make almost all of their money through both service and financing. It is likely they will either need to be heavily incented to sell the electric vehicles, or will simply steer the consumer to those vehicles that will maintain their profits.

We believe these types of challenges will pressure both the revenue and profits of old blue chip companies while the challengers are growing their revenue and profits with scale. In the end, few of the old guard will thrive, and many will not survive. We welcome you to join us on the path of discovery of the next generation blue chip companies, those using the tools of the Fourth Industrial Revolution to disrupt the old industrial base.

All the Best to You,

AKW