Overview – TMT

The TMT sector is comprised of Technology, Media and Telecommunications. The technology sector includes companies that design and manufacture both hardware and software for a variety of consumer and industrial end markets. The media sector encompasses firms that distribute, broadcast, and print audiovisual content through both traditional publishing, such as television and film, as well as modern platforms emerging from increased web-based and mobile application browsing.  Furthermore, the telecommunications sector includes firms that design and manufacture both semiconductors and networking equipment, while providing supplementary communication services and support.

Our Senior Analyst Aza Albogatchieva, Junior Analysts Chris Hon and Jerry Zhang, and Research Analyst Adrian Lau cover this sector.

Sector Themes – TMT

In regards to media and telecommunications, key themes that are shaping the sector include an expansion in wireless offerings, cell tower growth, increased Internet-of-Things (IoT) business application and definitive prominence of a risk of spectrum scarcity. In particular, as mobile data continues to act as the key consumer draw within the industry, cable companies offering broadband and WiFi are testing ways to mimic wireless networks, therefore setting the stage for new cross-industry partnerships. Conversely, traditional “wireline” telephone companies continue to face strong headwinds from broad consumer shifts toward data and wireless services and away from wired voice services. Moreover, amidst peaking demand for hardware adoption, demand for mobile data continues to grow. As such, as carriers build capacity to fulfill this demand, cell tower operators will reap the benefits of strong contracts with wireless carriers, and remain a necessary partner in network upgrades. In addition, demand for telecommunications services among firms in the manufacturing and transportation sectors will continue to grow, particularly through the increased usage of IoT solutions for asset tracking and building monitoring systems. Finally, a key focus within the sector is wireless spectrum, which encompasses the regulated set of radio frequencies used for wireless data and voice transmission. Due to the assets’ limited supply and changing market dynamics, per-unit spend on spectrum hit a 10-year peak in 2015. With the FCC planning a spectrum auction in 2016, increased spending will be required for carrier to maintain competitive positions and extend wireless networks.

In recent times, a select few themes within the technology industry have proliferated the space and attracted significant attention and investment prospect from the market. The internet services and software industry has seen a rapid growth in the megatrend areas of cloud computing, an internet-based computing platform where resources are shared in an on-demand pool, and everything as a service (XaaS), where services and applications are centralized online rather than being utilized on-site. Furthermore, companies are increasingly relying on big data analysis and artificial intelligence to make important business decisions. According to a recent survey by Gartner Inc. in September 2015, more than three-quarters of the industry’s IT and business leaders are investing or planning to invest in big data in the next two years. Fintech, or financial technology, is a term applied to the exploding technology start-up scene that is disrupting the banking sector, specifically within mobile and online banking, money transfers, loans, fundraising and asset management. Examples of such companies include GroupLend, a start-up that serves as a market place lender, providing consumer loan lending services to applicants, and SeedUps, an equity crowdfunding platform that connects early stage companies with investors. Cryptocurrency, or blockchain, a term for digital or virtual currency that uses cryptography for security, has garnered the attention of the financial industry. Major banks including industry leaders Goldman Sachs, Bank of America, UBS, and many others have taken part in the latest developments, filing patents and investing in in-house R&D teams dedicated to blockchain initiatives. On the same note, the start-up scene has been saturated with unicorns – start-up companies that command valuations of $1 billion and upwards. Notable unicorns include Uber Technologies, Xiaomi, Airbnb, Palantir, Snapchat, and Spotify.

Outlook – TMT

The media and telecommunications industry performance in 2016 will shaped by several key investment opportunity. In particular, the level of competition among North American wireless carriers will likely remain intense in 2016 amid a price war in the United States and a weakening economy in Canada due to a continued decline in oil price. In regards to the United States, this price war is poised to enter its third year, with T-Mobile and Sprint slashing prices in a bid to gain share of major industry players, AT&T and Verizon. The potential entry of cable companies into the wireless market in 2016 will only add to this pressure, likely weighing on revenue growth and margins. In addition, mobile broadband access using the 3G and now the 4G/LTE networks has continued to expand as users add tablets, modems and phones as alternative communication methods and connection to cloud based services. Moving forward, LTE (Long Term Evolution) will be the most sought after next-generation wireless communications technology, with the number of LTE subscribers globally at the end of 2015 at 907 million compared to 635 million at the end of the 2015 first quarter.

Going forward, the technology industry in 2016 will be seeing heavy competition and increased volatility. Technology firms are threatened by disruptive start-up companies backed by lucrative venture funding, as well as other aggressive competition. Hardware and software companies will face the challenge of increasing their profit margins and market share in the midst of growing demands and expectations from customers who are seeking products and services at unparalleled levels of customization and performance than before. Volatility in the industry is enhanced by the lofty ($1B+) valuations that which numerous start-up companies have received, despite the fact that many of them have yet to generate meaningful revenue. Unicorns face the challenge of living up to expectations and sustaining growth that is implied from their valuations. Furthermore, 2015 saw record-setting technology M&A at extremely high valuations. Driving the year’s consolidation activity were in large part the semiconductor industry, highlighted by market share expansion, Internet of Things opportunities, rising costs of R&D, and China’s aggressive new focus on semiconductor production. A flurry of M&A activity is expected to continue into 2016, with notable deals including Dell-EMC, which is expected to close in 2016. Also in 2016, big data, cloud computing, and XaaS, will be seeing heavy growth as demand for services and centralized platforms increase and big technology firms, such as IBM and Amazon, continue with heavy investment into their products.

Overview – Healthcare

The healthcare sector can be encompassed through a focus on two primary industry groups. The first includes companies who manufacture health care equipment and supplies or provide health care related services, including distributors of health care products, providers of basic health-care services, and owners and operators of health care facilities and organizations. The second regroups companies primarily involved in the research, development, production and marketing of pharmaceuticals and biotechnology products. Given the defensible nature of the sector, a distinct lack of economic sensitivity, leads key drivers of growth to traditionally encompass longer-term themes. As such, underpinning performance in the health care sector moving forward are the powerful long-term trends of an aging global population, emerging middle class in developing countries, and increased innovation, which have positioned the sector for favorable performance.  In terms of concerns, policy risk will take on a new dimension in the presidential election year, especially with regard to prescription drug pricing. While, sector volatility could escalate in such an environment, the economics of the sector are ultimately unlikely to materially change.

Our Senior Analyst Aza Albogatchieva, Junior Analysts Chris Hon and Jerry Zhang, and Research Analyst Adrian Lau cover this sector.

Sector Themes – Healthcare

 

The healthcare sector is driven simultaneously by two differing dynamics playing upon prevention and treatment. On the prevention side, as a health conscious attitude incorporates itself within the everyday lifestyle, the landscape of the healthcare industry is evolving rapidly to capitalize on these new opportunities. Across North America, annual doctor visits are increasing and even employers are adapting to this new mindset by establishing incentive programs for employees. The continued embodiment of web and mobile technology advancements will allow opportunities for growth as healthcare professionals take on new technology to access, update, and share patients’ profiles and prescription details safely and accurately. Transversely, spending on healthcare products and services in the US has increased by 5.3% in 2014 to 3 trillion largely due to the prevalence of obesity related diseases. It is evident that a large portion of the US population continues to neglect precautions for obesity resulting in the contained demand for healthcare services. As a result of this increased demand, businesses within the healthcare industry are presented with a plethora of opportunities to implement new service delivery methods and technologies. Online record-keeping, web based consultations, mobile lab services and drug testing operations can become improvements to convenience and efficiency within the healthcare sector. Ultimately, the growth in the healthcare industry will continue to be driven simultaneously by the alignment to a health conscious attitude in prevention as well as the demand for treatment as unhealthy habits continue.

Outlook – Healthcare

Within the 2016 outlook for the healthcare sector, there are many investment opportunities that would lead to the favourable performance of this sector. Notably, the presence of long-term trends in demographics and an aging population allows large-cap healthcare companies to benefit from a growing customer base. Recently, the new trend of innovation within biotechnology, health-care information technology, and medical devices provides new avenues for top-line revenue growth that are shielded from competitors. Within the US, rates for medical service utilization are expected to increase with a decrease in unemployment due to greater access to health insurance. Furthermore, M&A activity is expected to increase within healthcare companies due to attractive valuations and high levels of free cash flows within companies driving inorganic growth.  However, there is a level of risk regarding government policies affecting pharmaceutical companies and the prices they charge for their prescription drugs. This is due to various campaign speeches in the U.S. presidential election on the issue of prescription drug price surging which could lead to headwinds for stock prices in the near future. Overall, despite government policy risks serving as headwinds in the near future, investment opportunities are present within the healthcare sector due to the continuation of long-term trends, improvements in medical service utilization, innovation within the industry, and M&A activity potentially enhancing shareholder value.