Who Really Profits from a Technological Revolution?
Last week the financial markets were given a clear reminder that enthusiasm and returns are not the same thing. Shares in chipmakers and in companies building data centres for artificial intelligence fell sharply worldwide. The trigger did not come from the technology itself, but from the bond market. The interest rate on the loans of a heavily financed data centre operator rose to around fifteen percent, a level investors normally associate with companies in serious trouble.
A pattern that repeats
This is not the first time it has happened. In the nineteenth century, thousands of kilometres of railway line were laid in England and the United States, often with borrowed money and on the basis of highly optimistic expectations. The railway changed the world, but many railway companies went bankrupt. Around the year 2000 the pattern repeated itself with fibre-optic networks. The cables laid then still carry a large share of internet traffic today, but the companies that financed them with debt largely disappeared from the stock exchange.
The lesson is not that new technology is overrated. The lesson is that the value of a technological revolution often ends up with parties other than the companies most in the spotlight. Society almost always wins. The shareholder in the most talked-about company far from always does.
The sellers of shovels
There is an old piece of wisdom in the investment world: during a gold rush, the sellers of shovels and picks often earn more than the prospectors themselves. Those shovels are more tangible today than is often assumed. Every data centre needs enormous quantities of electricity, and that electricity has to be generated, transported and distributed. European grid operators will invest tens of billions of euros over the coming years in strengthening the electricity network, in cables, transformer stations and connections for offshore wind farms.
Such investments are generally made on the basis of long-term contracts with regulated parties, and not on the expectation that some new service will eventually become profitable. That makes demand for this infrastructure less dependent on sentiment on the stock exchange.
Financing determines the outcome
The difference between winners and losers often lies not in the technology, but in the way the growth is paid for. A company that builds capacity with borrowed money, before demand has been proven, is vulnerable when interest rates stay high. In the United States the yield on ten-year government bonds is around five percent, and inflation last week came in higher than expected. In such an environment, every debt becomes more expensive to refinance.
A company that delivers on the basis of a well-filled order book, that pays for its growth largely out of its own cash flow and keeps its debt position manageable, is in a very different situation. It does not have to hope that the capital market will keep financing it. It was striking, then, that last week, while technology shares fell, the majority of companies in the broad American equity index actually rose. Investors shifted their money, but did not flee the market.
What history teaches
For the long-term investor, the question is therefore not only which technology has a future, but who earns from it in a durable way. That calls for attention to balance sheets, cash flows and contracts, and less attention to stories. The most solid investments in a technological wave are often the least conspicuous: companies that supply the underlying infrastructure, that have existed for decades and that keep their customers, whichever application ultimately wins.
Technological revolutions are real, and they make the world richer. History shows, however, that the path to that wealth rarely runs directly through the most talked-about shares. Patience, discipline and a critical eye on debt remain the most reliable compasses in this wave too.
Disclaimer. This article is published by Beaver Funds for general informational and educational purposes only. It reflects the personal views of the author at the time of writing and does not constitute investment advice, a recommendation, an offer, or a solicitation to buy or sell any security or financial instrument. References to specific companies are illustrative and should not be interpreted as buy or sell recommendations. Investing involves risk, including the possible loss of principal. Past performance is not a reliable indicator of future results. Readers should consult a qualified financial advisor before making any investment decision based on their personal circumstances. Beaver Funds is supervised by the Centrale Bank van Curaçao en Sint Maarten (CBCS).
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