Edison Investment Research

RFM 2017 – Top 5.

Artificial Intelligence.
  AI is likely to be the most important theme in the technology sector this year.
  This is because AI could become a major differentiator in determining which Digital Life services are the best and therefore preferred and paid for by consumers.

Artificial Intelligence.

  AI is likely to be the most important theme in the technology sector this year.
  This is because AI could become a major differentiator in determining which Digital Life services are the best and therefore preferred and paid for by consumers.
  AI will also underpin the autonomy of any machine be it an automobile, a drone, a piece of factory equipment or a thermostat.
  Hence, I expect that the hype and the claims being made with regard to AI will intensify further in 2017 making it even more difficult for executives and investors to see what the realities are.
  While the hype will be huge, the progress will be slow as developing truly intelligent machines requires far more than just advances statistics.
  I am looking for companies that are addressing the three real challenges of AI (see here) as it is the solution of these problems that will allow the quality and richness of services to really evolve.
  RFM research finds that it is the search engines, Google, Baidu and Yandex that lead this field because they have been doing it the longest.
  Everyone else is scrambling as fast as they can to catch up and are making an increasing amount of noise at the same time.
  I expect to see feverish M&A activity in 2017 as AI currently takes so long to create that many players may feel they have no other choice than to acquire.

Autonomous time bomb.

  Autonomy is likely to be everywhere at CES from domestic robots and drones to cars but I still think this is very far away from becoming viable.
  The technology still has a long way to go before it is reliable enough before it can be trusted with the lives of every day users but I do not see this as the biggest problem.
  The biggest issue, as I see it, remains me feeling that the market will not be ready to receive autonomy until long after the technology itself has matured.
  This is because transport involves risk and with risk comes liability when, inevitably, something goes wrong.
  I have written numerous times (see here and here) about why the technology will be ready long before the market is ready to deploy it.
  I think that this will result in a shakeout.
  Investors have been promised results and when the technology they have invested in has to sit on the shelf for several years, they are unlikely to be forthcoming with further capital.
  Hence, I think that there is no real need to invest everything in autonomy now (outside of AI) as there is a very good chance that there will be bargains to be had when everything takes far longer than expected to start earning a return on investment.

User growth slowdown.

  The growth of the hardware companies has been hammered over the last 12 months as smartphone shipment growth has slowed to below 5%.
  I think that this is likely continue in 2017 resulting in consolidation (see below).
  In contrast the companies whose revenues are based on the number of users, Google, Alibaba, Tencent, Facebook and so on, have enjoyed a great 2016 as the number of ecosystem users has continued to grow very healthily.
  RFM calculates that global mobile ecosystem users grew by 12% in 2015 which combined with good growth in usage per user underpinned the 20%+ revenue growth seen from most of these players.
  However, I think that 2017 will see both of these metrics slow with users slowing to around 8% YoY.
  I think that this will still allow the companies whose growth is based on users not devices to show comfortably more than 10% but where investors have very high expectations, I see disappointment.
  Facebook has already done this in saying that growth will slow materially in 2017 (see here).
  I doubt it will be the last.

Hardware consolidation.

  The further slowing of smartphone device shipments is going to put more pressure on those trying to make a living by selling hardware.
  There will be less and less differentiation in Android as Google and the BATmen (see here) take more and more control of the software that runs their ecosystems.
  This leaves the hardware companies with the opportunity to differentiate through a cross device strategy (like Samsung, Apple and Microsoft) or by competing for scale (Samsung).
  The execution of both of these opportunities increases the scope for consolidation among the hardware companies and I expect to see more deals in 2017.
  Samsung buying Harman and Qihoo acquiring Blephone are good examples of the type of M&A I expect in hardware this year.

Year of the donkey.

  Unicorns are, by definition, very rare and I think they will become even rarer in 2017.
  Many companies masquerading as Unicorns have been unable to execute on their promises leading to falling valuations and high executive turnover.
  These are what I have referred to many times as donkeys (see here) who fear are going to have an even tougher time in 2017 than they did last year.
  In the networked economy, a true unicorn needs to be almost unopposed in its field or be in a position to develop a commanding position in its market.
  Furthermore, it must have management that is capable of executing as the best idea is worthless unless it can be brought to life.
  Facebook, Uber, Airbnb, Linked-in, Amazon and Spotify are all good examples of companies that meet or are close to these criteria and it is these that I would consider to be the true unicorns.
  Snap Inc., Magic Leap, LINE , Flipkart, Ola and so on are good examples of companies that currently command the valuation but where I am reluctant to put them in that hallowed territory.
  I expect the list of unicorns to grow shorter as more and more of these companies show their true colours in the more difficult environment.

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