Tag Archives: Baidu

Artificial Insurance

The digital transformation of existing business models is a theme of our age. Robotic process automation (RPA) is one of the many acronyms to have found its way into the terminology of businesses today. I highlighted the potential for telecoms to digitalise their business models in this post. Klaus Schwab of the World Economic Forum in his book “Fourth Industrial Revolution” refers to the current era as one whereby “new technologies that are fusing the physical, digital and biological worlds, impacting all disciplines, economies and industries, and even challenging ideas about what it means to be human”.

The financial services business is one that is regularly touted as been rife for transformation with fintech being the much-hyped buzz word. I last posted here and here on fintech and insurtech, the use of technology innovations designed to squeeze out savings and efficiency from existing insurance business models.

Artificial intelligence (AI) is used as an umbrella term for everything from process automation, to robotics and to machine learning. As referred to in this post on equity markets, the Financial Stability Board (FSB) released a report called “Artificial Intelligence and Machine Learning in Financial Services” in November 2017. In relation to insurance, the FSB report highlights that “some insurance companies are actively using machine learning to improve the pricing or marketing of insurance products by incorporating real-time, highly granular data, such as online shopping behaviour or telemetrics (sensors in connected devices, such as car odometers)”. Other areas highlighted include machine learning techniques in claims processing and the preventative benefits of remote sensors connected through the internet of things. Consultants are falling over themselves to get on the bandwagon as reports from the likes of Deloitte, EY, PwC, Capgemini, and Accenture illustrate.

One of the better recent reports on the topic is this one from the reinsurer SCOR. CEO Denis Kessler states that “information is becoming a commodity, and AI will enable us to process all of it” and that “AI and data will take us into a world of ex-ante predictability and ex-post monitoring, which will change the way risks are observed, carried, realized and settled”. Kessler believes that AI will impact the insurance sector in 3 ways:

  • Reducing information asymmetry and bringing comprehensive and dynamic observability in the insurance transaction,
  • Improving efficiencies and insurance product innovation, and
  • Creating new “intrinsic“ AI risks.

I found one article in the SCOR report by Nicolas Miailhe of the Future Society at the Harvard Kennedy School particularly interesting. Whilst talking about the overall AI market, Miailhe states that “the general consensus remains that the market is on the brink of a revolution, which will be characterized by an asymmetric global oligopoly” and the “market is qualified as oligopolistic because of the association between the scale effects and network effects which drive concentration”.  When referring to an oligopoly, Miailhe highlights two global blocks – GAFA (Google/Apple/Facebook/Amazon) and BATX (Baidu/Alibaba/Tencent/Xiaomi). In the insurance context, Miailhe states that “more often than not, this will mean that the insured must relinquish control, and at times, the ownership of data” and that “the delivery of these new services will intrude heavily on privacy”.

At a more mundane level, Miailhe highlights the difficulty for stakeholders such as auditors and regulators to understand the business models of the future which “delegate the risk-profiling process to computer systems that run software based on “black box” algorithms”. Miailhe also cautions that bias can infiltrate algorithms as “algorithms are written by people, and machine-learning algorithms adjust what they do according to people’s behaviour”.

In a statement that seems particularly relevant today in terms of the current issue around Facebook and data privacy, Miailhe warns that “the issues of auditability, certification and tension between transparency and competitive dynamics are becoming apparent and will play a key role in facilitating or hindering the dissemination of AI systems”.

Now, that’s not something you’ll hear from the usual cheer leaders.

Tech Treks

One lesson from the internet bubble is that big is beautiful in tech. But longevity is another lesson, think Yahoo! So one must be fickle in ones tech affections and one must never ever pay too much. After much patience, I was lucky enough to eventually get into Apple in early 2013 when sentiment was particularly sore. I didn’t manage to heed my own advice on getting into Google at a reasonable price in December 2014 when it was trading around 60% of its current value, as per this post on internet relative valuations (more on that post later). Since 2013, I have watched sentiment gyrate on AAPL as the standard graph I use below illustrates (most recent AAPL posts are here and here). I used the current $135 price high as the most recent data point for the Q12017 valuation.

click to enlargeaapl-forward-12-month-pe-ratios-q1-2017

Investors and analysts seem giddy these days about the impact of Trump tax changes and the iPhone 10 year anniversary on AAPL and have been pointing to Berkshire’s position increase in AAPL as confirmation bias of more upside. I, on the other hand, have been taking some of AAPL off the table recently on valuation concerns and will likely again be a buyer when the inevitable worries return along the “one trick iPhone pony” lines. God bless gyrating sentiment! Even Lex in the FT was saying today that the current TTM PE ex net cash of 13 is reasonable (eh, a TTM PE ex net cash of 7 a year ago was more reasonable)! AAPL still has be a core holding in anybody’s portfolio but prudent risk management requires trimming at this price in my opinion.

In my search for new ideas whilst I await some divine sense to emerge from the Trump & Brexit fog, I thought it would be interesting to revisit the post referred above on internet valuations. First off, I took the graph showing forward PEs to projected EPS growth using analyst estimates from December 2014 and inserted the actual change in share price from then to now. Two notable exceptions, at the extremities, from the graph below are Amazon and Twitter with share price changes of 173% and -56% respectively.

click to enlargeinternet-multiples-dec14-as-at-feb17

Although every company is different and has its own dynamics, my simplistic take from the graph below is that high PE stocks (e.g. > 40) with high EPS projections (e.g. > 35%) can easily run aground if the initial high growth phase hits harsh reality. The sweet spot is decent PEs with EPS growth in the 15% to 35% range (again assuming one can get comfortable that the EPS growth projections are real) indicative of the larger established firms still on the growth track (but who have successfully navigated the initial growth phase) .

A similar screen based upon today’s values and analyst estimates out to 2018 is presented below. This screen is not directly comparable with the December 2014 one as it goes out two years rather than one.

click to enlargeinternet-multiples-feb2017

Based upon this graph, Google and Netease again look worthy of investigation with similar profiles to two years ago. Netease has the attraction of a strong growth track record with the obvious Chinese political risk to get over. Expedia looks intriguing given the strong growth projected off a depressed 2016 EPS figure. Ebay and Priceline may also be worth a look purely on valuation although I have a general aversion to retail type stocks so I doubt I’ll bother look too deeply. All of the data used for these graphs is based upon analyst estimates which also need to be validated.

Valuations currently are juicy, generally too juicy for me, so this exercise is simply one to determine who to investigate further for inclusion on a watch-list. Time permitting!

To China and back

Chinese internet stocks are way way way out of my comfort zone. Besides the hype and transient nature of many business models, the stratospheric valuations and the political risk are issues that I can’t get my head around. With the Chinese stock market up 25% in a month, it looks like classic bubble territory.

That said, the latest IDC predictions for 2015 recently caught my attention. One of the predictions asserted the following:

“China will experience skyrocketing influence on the global information and telecommunications technology market in 2015 with spending that will account for 43% of all industry growth, one third of all smartphone purchases, and about one third of all online shoppers. With a huge domestic market, China’s cloud and ecommerce leaders (Alibaba in ecommerce, Tencent in social, and Baidu in search) will rise to prominence in the global marketplace. Similarly, Chinese branded smartphone makers will capture more than a third of the worldwide smartphone market.”

Every now and again (as I did in this post) I look at how a few of the Chinese internet stocks that trade in the US are progressing for the sake of curiosity. The graph below shows a selected few – Baidu (internet search), NetEase (online gaming), Ctrip (travel services), Sina (online media), Sohu (various online services), Tencent (social, traded in Hong Kong), and Alibaba (e-commerce). click to enlargeChinese Internet Stocks December 2014 Tencent is the biggest gainer at over 300% since 2011; NetEase is just below 300%; with Baidu over 200%. Alibaba is up 16% since its stock market debut in September. Since 2011, the underperformers are Ctrip about breakeven, Sohu down 20%, and Sina down 50%. An equally weighted portfolio of these stocks, excluding Alibaba, invested at the beginning of 2011 would have resulted in an 84% gain or an approx 16.5% annual return. The current price to 2015 projected EPS multiples against the 2014 to 2015 projected EPS growth for these stocks compared to the same metric for a number of the established US internet names gives an insight into current valuations, as per the graph below.

click to enlargeInternet multiples Looking at this graph, Baidu is the only Chinese stock of the names highlighted by IDC that looks to me like one that may warrant further investigation as an investment possibility (but only when there is a meaningful pull back in the market in 2015). However, I wouldn’t be rushing out to get involved anytime soon as it seems to me that an established internet name like Google is more interesting as an investment prospect at current relative valuations than any of the higher growth Chinese equivalents.

Chinese internet stocks on fire, again.

Every experienced investor, like a jaded poker player, has stories akin to bad beat tales – great investments that got away. This post is not one of those tales. Seven odd years ago I did have a look at a few of the then hot Chinese internet shares – SINA and SOHU in particular. Both were growing solidly and were valued with big future growth assumed. Given the heated valuations and the lack of a credible history at that time, I passed. I was also uncomfortable with the political risk factor.

It was therefore with interest that in recent months I noticed a few stories about stock increases in some familiar Chinese internet names. A quick look through the key statistics on Yahoo confirms that valuations remain aggressive with PEs based upon 2013 projected earnings in the 20 to 40 range across a sample of firms (albeit not as wild as in the past).  Quarterly revenue, if not profit, growth also looks healthy at 20% to 30%.  The graph below shows the share prices of some of the better known Chinese internet firms over the past seven years.

click to enlargeChinese Internet Stocks August 2013

Although I suspect my risk appetite will never be comfortable with valuations in this sector, at some stage, I’d like to dig deeper into the quality firms in this space to figure out if there is any appropriate risk/reward investment angle that I could live with (and at what entry level on valuation). If nothing else, the rise and fall over 2011 to 2012 of SINA and SOHU looks intriguing (for old time’s sake!).