Omni Supreme & Omni AIoT: Providing Exposure To Multiple Growth Vectors
OmniScience runs two US strategies, viz., Omni Supreme and Omni AIoT. Both strategies are based on the Scientific Investing Framework which focuses on selecting from the investment universe by eliminating Capital Destroyers, Capital Eroders, and Capital Imploders; and, creating a SuperNormal Portfolio of SuperNormal Companies at SuperNormal Prices from the Capital Multipliers which remain.
This SuperNormal Portfolio has companies with persistent competitive advantages, stable business operations providing significant cash flows & strong balance sheets providing the resources to fund future growth and create value for the shareholders over the long-term. All of this while being available at significant discount to intrinsic values.
What might be not so obvious about the SuperNormal Portfolio is that it is highly diversified in terms of the growth vectors it captures. Both portfolios provide exposure to multiple growth vectors. Several growth vectors are much loved by the market and Mr. Market is chasing some popular companies at premium valuations to get that exposure. The Omni portfolios provide exposure to the same growth vectors, but at significant discounts to their intrinsic values.
A common pattern is that these well-known growth vectors are underappreciated because they are hidden as divisions of much larger companies. Another pattern is where the growth vectors themselves are lesser known and hence less appreciated. There is also a pattern where growth vectors mingle with legacy businesses confusing Mr. Market as to the true value of each. Viewing and valuing the legacy and growth businesses independently leads to a truer picture which, when unlocked, delivers significant alpha to the portfolio.
In all these cases, naturally, the exposure is at a significant discount to intrinsic value.
Omni Supreme
Omni Supreme is a market-cap-agnostic strategy (multi-cap or flexi-cap) which includes large, mid and small-cap stocks in the US markets. This strategy is based on OmniScience’s Scientific Investing Framework which delivers a SuperNormal Portfolio of companies. These portfolio companies have strong balance sheets and persistent competitive advantages making them SuperNormal Companies. The enterprise values of these companies ranges from just below $1 billion to $2.5 trillion. As per our estimations, the intrinsic values of these companies are much larger; meaning, they are available at SuperNormal Prices.
The current portfolio of Omni Supreme can be broadly segmented into 4 segments. The four segments are Artificial Intelligence and Internet of Things (AIoT), Athleisure and Wellness, Millionaires and Luxury, and Consumption. For a detailed understanding of the Omni Supreme portfolio read this report, titled, ”Omni Supreme US: Scientific Investing in the Land of Opportunity”.
Exhibit 1: The Omni Supreme Portfolio Segments. Source: OmniScience Capital Research
Each of the segments is a large, nearly trillion-dollar opportunity. The Omni Supreme portfolio has a number of growth vectors within it. For example, McKinsey estimates the global wellness market to be around $1.5 trillion and growing at the rate of 5% to 10%[1]. Based on a consumer survey, they divide this market across the following 6 dimensions:
- Better Health
- Better Fitness
- Better Nutrition
- Better Appearance (includes Athleisure)
- Better Sleep
- Better Mindfulness
The potentially rewarding thing about Scientific Investing is not about just identifying growth vectors, but rather identifying companies which have exposure to growth vectors but are not recognized by Mr. Market as such. Consider the case of a prominent athleisure company with a market cap of $52 billion, revenues of $5 billion, $600-$900 million free cash flow and 16% growth rate. This company is loved by Mr. Market; and definitely not part of the Omni Supreme portfolio. Guess why?
Absolutely right. While it is a SuperNormal Company, it is not available at SuperNormal Prices.
Now consider another company, which is part of the Omni Supreme portfolio. A division in this company is a close competitor of the above athleisure company. This division currently generates a $1 billion in sales and the company targets sales of $2 billion by 2023. Going by Mr. Market’s assessment of the value of the former company, this division should be valued at more than $10 billion. However, this whole company is available at a market-cap of $11 billion and enterprise value of $16 billion. This company has another division with sales of $8 billion which it targets to grow to $10 billion by 2023. There are two more divisions with multi-billion-dollar sales. The remaining divisions with $15 billion in revenues are available at $6 billion. Interestingly, the normalized free cash flows this company generates at $600-$900 million are similar to the market favourite cited above. The company management is working on a number of specific initiatives to boost the margins further.
[1] https://www.mckinsey.com/industries/consumer-packaged-goods/our-insights/feeling-good-the-future-of-the-1-5-trillion-wellness-market#
Exhibit 2: Comparison of Athleisure segment companies. Source: OmniScience Capital Research, Third party data sources, company filings.
Another interesting growth vector is the Life-From-Home phenomena, i.e., work-from-home, play-from-home, learn-from-home, etc. This trend, also called, “home nesting” is here to stay. From the CEO of one of the portfolio companies:
These are permanent structural shifts that we are seeing towards more hybrid work and learning models, streaming entertainment and a sustained focus on the home. This increased penetration of consumer electronics presents opportunity, as we grow our consultative in-home model to help our customers optimize the potential of their technology, as well as our unique support model that keeps it all working the way they want.
CEO, Consumer Electronics Retailer
This growth vector is likely to significantly increase the demand for various consumer products including home merchandise and consumer electronics. The Omni Supreme portfolio is well-placed to benefit from this growth vector of Life-From-Home which is estimated to be more than $400 billion.
An interesting growth vector is millionaires and wealth. According to Credit Suisse[1], the US has about 20 million millionaires and added more than 10% new millionaires, i.e., 2.3 million millionaires from 2019 to mid-2020. The total wealth in the US is $114 trillion. The Omni Supreme portfolio has exposure to wealth management and financial services targeted to high net worth (millionaires) and ultra-high net worth individuals.
Besides the above a number of growth vectors are captured in the AIoT segment of the Omni Supreme portfolio. Some of these are revealed in the next section which focuses on the Omni AIoT strategy. While the Omni Supreme portfolio has several AIoT companies in the AIoT segment of the portfolio, the Omni AIoT portfolio provides exposure only to this segment and has many more companies.
Omni AIoT
Technology is transforming the way we live and impacts us across economic, social, and political dimensions. The transformative technologies, such as, Artificial Intelligence, Internet of Things, 5G, Robotics, Industry 4.0 are disrupting the old ways; and at the same time, providing opportunities for growth for companies which are able to transform their business models.
OmniScience Capital has a proprietary universe of around 170-180 companies which have products or services related to Artificial Intelligence, Internet of Things, 5G, or other related or adjacent technologies. The Omni AIoT portfolio selects from this universe using the Scientific Investing Framework. The companies should have strong balance sheets, persistent competitive advantages and should be available below their intrinsic values. For a detailed understanding of the Omni AIoT portfolio read this report, titled, ”Entering the Matrix-Understanding the Intelligent Digital Universe of the Omni AIoT US Portfolio”.
[1] https://www.credit-suisse.com/media/assets/corporate/docs/about-us/research/publications/global-wealth-report-2020-en.pdf
Exhibit 3: The Omni AIoT Portfolio Segments. Source: OmniScience Capital Research
The selection framework takes into account the fact that many of these companies have intangible assets which might not be stated on their balance sheets. Due to the high—in some cases hyper—growth opportunities, there is a lot of growth investing in the form of research and development and market development in these companies happening through the income statement. The Scientific Investing Framework remains aware of this.
The Omni AIoT portfolio is invested across multiple segments, viz., Digital Brain, Digital Work and Digital Life. The Digital Brain segment consists of companies providing the hardware and infrastructure to enable AI. These are companies involved in sensors, processing chips, memory chips, other semiconductor devices or fiber optics and other transmission technologies and devices. These enable collection, transfer, and storage of data.
The Digital Work segment relates to companies which provide solutions for enabling digital transformation of businesses. Some of these companies provide cloud platforms, some provide enterprise software on the cloud, some provide digital content, cybersecurity solutions, networking technologies, or 5G technologies. Still others could provide business productivity tools or workplace collaboration tools. Some provide robotic process automation or augmented reality/virtual reality tools. Companies might provide digital marketing, AI, IoT, Industrial IoT, Big Data, Analytics and Blockchain solutions as well.
The Digital Life segment relates more to consumers. This is focused on Life From Home, including Play From Home, Learn From Home, Shop From Home and Live From Home. The platform providers and digital infrastructure providers enabling the digital Life From Home are also considered under this.
The portfolio provides exposure to an astounding array of growth vectors which are transforming life as we know it.
For example, several portfolio companies provide exposure to play from home or entertainment from home. Consider a well-known entertainment from home company which is not part of the portfolio. With around 200 million subscribers worldwide and 75 million in the US, and a revenue of $28 billion, this company is valued at nearly $230 billion in terms of market capitalization.
One of the portfolio companies has around 200 million subscribers worldwide and 150 million in the US. This company provides entertainment similar to the aforesaid company, but it is bundled with other services. The subscription revenue of this company is around $25 billion. Another portfolio company also provides entertainment services but has more than 2 billion users worldwide. The business model of this company is more advertisement driven rather than subscription driven. The revenue of this division is $20 billion.
Exhibit 4: OTT/Streaming services companies’ comparison. Source: OmniScience Capital Research, Third party data sources, company filings.
The interesting thing is that while the standalone entertainment company is probably overvalued, or at best, fairly valued, the divisions inside these portfolio companies might be underappreciated by Mr. Market since they are relatively small contributors in terms of the respective company revenues.
Let us look at another interesting growth vector. This is electric vehicles/autonomous vehicles or self-driving cars. One of the most famous new age automobile companies claims that its revenue and valuation could double if it develops a network of self-driving robotaxis. A guess that this company is NOT in the Omni AIoT portfolio would be right. However, several companies in the Omni AIoT portfolio provide exposure to this growth vector. Most likely the investor is getting this exposure at a significant discount to intrinsic value; probably free.
One of the companies in the portfolio owns fully or partly, at least, 3 companies which could be working on different aspects of autonomous or semi-autonomous vehicles. Another portfolio company has a division which is the leader in terms of autonomous miles driven. It has driven the equivalent of 800 times around the earth or about 40 trips to the moon and back. For autonomous driving, which is based on artificial intelligence, the data gathered provides a significant competitive edge. Another portfolio company well-known for premium consumer electronics products is rumoured to launch an autonomous vehicle as early as 2024. Several other portfolio companies have significant projects or initiatives around self-driving cars. In most of these cases, the investor is hardly paying anything for this exposure since the cash flows from other divisions of the company are enough to justify the market valuation of the company.
Exhibit 5: Autonomous/Electric Vehicle segment details. Source: OmniScience Capital Research, Third party data sources, company filings.
Another interesting growth vector in the Omni AIoT portfolio is Quantum Computing and Quantum AI. Several companies in the portfolio provide exposure to this emerging field with intense research and development taking place. According to McKinsey, Quantum Computing could deliver value to a few companies within the next 5 years[1] and would have significant impact 2030 onwards.
Solving the impossible in a few hours of computing time, finding answers to problems that have bedeviled science and society for years, unlocking unprecedented capabilities for businesses of all kinds—those are the promises of quantum computing, a fundamentally different approach to computation.
McKinsey & Company
The portfolio, of course, provides exposure to the growth vectors of Artificial Intelligence, 5G, Robotics, AR/VR, Cloud among others.
While the above discussion has been around lesser-known growth vectors or innovative ways of getting exposure to the well-known ones, there are several value unlocking situations in the portfolio. For example, one of the companies is demerging into a slow-growth technology infrastructure services company which would become the largest such company in the world, post-demerger. The remaining company would be a growing cloud company with a number of unique capabilities, including one of the earliest commercial Artificial Intelligence and Quantum Computing units.
Several portfolio companies will win from the 5G growth cycle. These companies span the fundamental 5G networks technology to 5G smart phones. The 5G growth vector is likely to prove quite rewarding over the next 5-7 years.
Shouldn’t such high growth exposure be at premium valuations?
With the kind of growth vectors in, both, Omni Supreme and Omni AIoT, it is natural to wonder whether the portfolios might not be at premium valuations. Let us look at the recent numbers of these portfolios.
Omni Supreme is available at a Price-to-Cash Flow (PCF) of 11.3 as opposed to S&P 1500 PCF of 19. On Price-to-Book Value (PBV) Omni Supreme is available at 3.3 while S&P 1500 is available at 4.4.
Similarly, the Omni AIoT PCF is 16.2 vs Nasdaq 100 PCF of 23.3. The PBV for Omni AIoT is 5.2 vs Nasdaq 100 PBV of nearly 9.
Above data shows that Omni Supreme and Omni AIoT portfolios are priced significantly lower in terms of price multiples compared to the market indices. However, these ratios do not show the full extent of the mispricing in the portfolio. As shown in this report, there are a number of divisions in the portfolio companies providing exposure to lesser-known or lesser-appreciated growth vectors which are probably not fully incorporated in the market valuations of these companies. These could provide significant alpha-generating possibilities for the portfolios.
[1] https://www.mckinsey.com/business-functions/mckinsey-digital/our-insights/a-game-plan-for-quantum-computing
Download Full Report Omni Supreme and Omni AIoT - Providing Exposure To Multiple Growth Vectors
Disclosures & Disclaimers
Omniscience Capital Advisors Private Limited (Omniscience Investment Advisers) is a SEBI registered Investment Advisory firm with registration no. INA000007623.
Equity investments are subject to market risks. Global investments are subject to currency risk, country risk and other risk factors. Please read all related documents carefully. An investor should consider the investment objectives, risks, and charges & expenses carefully before taking any investment decision. Wherever there is the potential for profit there is also the possibility of loss. Therefore, investors may lose capital in markets. Past performance is not necessarily indicative of future results. This is not an offer document. This material is intended for educational purposes only and is not an offer to sell any services or products or a solicitation to buy any securities mentioned or otherwise. Any representation to the contrary is not permitted. This document does not constitute an offer of services in jurisdictions where the company does not have the necessary licenses.
Performance is based on the investments done in portfolios with proprietary money. The performance numbers are pre-expense and unaudited. Global portfolios are maintained by an independent global custodian and the performance is calculated based on the portfolio holdings. India portfolios are maintained by Orbis Financial Corporation ltd, an independent, SEBI registered custodian and fund accountant; performance is based on the NAV maintained by the fund accountant. All benchmark returns and global portfolio returns are price returns starting from May 1, 2020. Beta and Standard deviation are calculated based on daily returns since inception. Individual returns of Clients for a particular portfolio may vary significantly from the mentioned model portfolio performances and the performance of the other portfolios. No claims may be made or entertained for any variances between the performance depictions and individual portfolio performance. The data is provided as an illustration of the behavior of the strategy under different market conditions. Reader should not use it to form an opinion about the future returns from the strategy. No express or implied guarantees or warranties about the accuracy and/or completeness of the performance are being made and OmniScience Capital shall have no liability for any damages, claims, losses or expenses. Neither the investment adviser nor its Directors or Employees shall be in any way liable for any variations noticed in the returns of individual portfolios.
Our discussion may include assumptions, estimates or other information that might be considered forward-looking. While these forward-looking statements represent our current judgment on what the future holds, they are subject to risks and uncertainties that could cause actual outcomes to differ materially. We assume no obligation to revise or publicly release any revision to these forward-looking statements in light of new information or future events. No guarantee can be given about the accuracy and/or completeness of the data, Omniscience makes no warranties or representations, express or implied, on the products and services offered. It accepts no liability for any damages or losses, however caused, in connection with the use of, or on the reliance of its product or services. The information relating to any company or economic trends herein is derived from publicly available sources and no representation as to the accuracy or completeness of such information can be made. We may have recommended stocks, or stocks in the mentioned sectors to clients, including having personal exposure.
This communication is confidential and is intended solely for the addressee. This document and any communication within it are void 30-days from the date of this presentation. It is not to be forwarded to any other person or copied without the permission of the sender. Please notify the sender in the event you have received this communication in error.