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All Contents © 2017The Kiplinger Washington Editors
By Will Ashworth
| September 2017
Technology’s a great thing when used by society to better itself. Often, when investors think of great technology, companies like Tesla Inc. (TSLA) and Amazon.com, Inc. (AMZN) spring to mind.
However, truth be told, technology is used by all kinds of businesses to make their companies more efficient.
“In ten years, every company will have to be an artificial intelligence company, or they won’t be competitive,” Loup Ventures Managing Partner Doug Clinton wrote in a July blog. “While traditional tech companies have been very forward about their advancements and investments in AI, there are non-tech companies that are poised to benefit from their efforts in AI.”
While many investors are looking for the next big technology stock, a small minority are less concerned about the technology itself, but rather how the technology is used by a non-tech company to create a wider moat.
I’ve come up with seven non-tech stocks using technology to win.
Prices and data are from the original InvestorPlace story published on September 6, 2017. Click on ticker-symbol links in each slide for current prices and more.
This slide show is from InvestorPlace, not the Kiplinger editorial staff.
It’s coming up on two years since Starbucks Corporation (SBUX) launched its digital ordering system to a large amount of skepticism. Today, SBUX has gotten the last laugh as its recent quarter showed that 9% of its customers ordered ahead of time and 30% paid for their orders using its smartphone app.
In the span of 17 quarters, SBUX has seen mobile payments go from 8% in Q3 2013 to 30% in this year’s third quarter. That’s what I call a non-tech company using technology to win.
“The kind of growth and financial performance we are seeing out of customers with whom we have digital relationships blows the socks off of anything Wall Street would possibly want to see,” Matthew Ryan, Starbucks’ global chief strategy officer told Barron’s recently. Unlike many in the retail world, Starbucks isn’t hiding in the corner worrying about Amazon coming to take its lunch. No, it’s trying to figure out how to redesign the layout of its stores so that pre-orders don’t get stacked up with those ordering in the store.
Ultimately, that might mean creating two bars for making drinks, so that customers aren’t bumping into each other trying to get to their orders. If this is the price it has to pay to maintain its global dominance in coffee retail, I’m sure its management would be more than happy to invest.
Macy’s Inc. (M) might be suffering along with most of the other department stores in America, but it’s not from a lack of trying. A year ago July, Macy’s partnered with International Business Machines Corp. (IBM) and its Watson supercomputer as well as Satisfi Labs, a company that specializes in creating virtual assistants, to deliver an in-store shopping assistant for customers using artificial intelligence to help people find things easier.
Introduced in just ten of its stores as a pilot program, Macy’s On Call is an innovation that retail sorely needs to fend off the e-commerce threat that’s shaking the industry to its very core.
“The combination of Satisfi’s location-based, intelligent engagement software, with the cognitive learning capabilities of IBM’s Watson, has helped us build a powerful and comprehensive tool to enhance the in-store shopping environment,” said Don White, chief revenue officer at Satisfi, at the 2016 launch.
While Macy’s results haven’t shown it’s making much progress transforming itself, Macy’s On Call says otherwise.
Purplellamas01 via Wikipedia
Who can forget the stat that was making the rounds earlier this year? It showed Domino’s Pizza, Inc. (DPZ) had delivered three times the returns to its shareholders since going public in the summer of 2004 compared to Alphabet Inc. (GOOG, GOOGL) that also came out around that time.
You don’t do that without getting a lot of things right.
“We’ve always been the best at delivery and been given credit for it by consumers,” said CEO Patrick Doyle in August 2010. “We’ve always been viewed as providing good value to the consumer. We were not given credit for great-quality food.”
So, it brought out a new pizza recipe that year, and business immediately took off; it’s been on a tear ever since. Now, the pizza giant is using technology to keep its business growing.
“Domino’s is not just in the pizza-making business, the CEO emphasizes, but in the pizza-delivery business, which means it has to be in the technology business,” wrote Fast Company co-founder Bill Taylor in November 2016 in the Harvard Business Review. “All that technology has changed how customers order (using the Domino’s app, or directly via twitter, or even by texting an emoji); how they monitor the status of their order; and how Domino’s manages its operations.”
That’s how you get 2,400% shareholder returns.
Anthony92931 via Wikipedia
If you’ve followed the M&A escapades of America’s second-largest drugstore chain, then you’re well aware that Walgreens Boots Alliance Inc. (WBA) is buying 2,186 stores from Rite-Aid Corporation (RAD) for $5.2 billion, a compromise made possible after both parties called off their merger.
Walgreens is a much better retail operator than Rite Aid; it wanted to do the merger so it could go in, fix the Rite Aid stores, and deliver more profits for its shareholders. It can still do that only on a slightly smaller scale. To help it with store makeovers, Walgreens turns to InContext Solutions, a Chicago-based company that uses virtual reality simulations to create better store layouts saving Walgreens time and money.
“Given the competitive nature of retail and all of the pressures coming from e-commerce, being able to bring new winning concepts/ideas to market faster, or on the opposite side knowing which ideas not to bring to market, is a huge competitive advantage,” Patrick Niersbach, the marketing director for InContext Solutions told the Observer. “And something our solutions enable them to do.”
Consider that Walgreen’s operating margins were just 4.8% in the trailing 12 months, yet they were almost four times those of Rite Aid. Walgreens mops the floor with Rite Aid and most every other drug store in the U.S. in large part because it uses technology to stay ahead of the competition.
That’s critical when only five cents out of every dollar falls into the profit category.
Courtesy General Electric
The jury is still out for me whether General Electric Company (GE) is doing enough to warrant my interest, but if it continues to push the technology envelope to grow its various businesses, it’s possible I’ll give it another look at some point down the road.
For now, I’m from Missouri. It’ll have to show me it’s serious about the digital world. In 2015, former CEO Jeff Immelt created GE Digital, a business that would bring together all its software-related initiatives under the command of Chief Digital Officer Bill Ruh. At the time, Immelt said it wanted to be a top 10 software firm by 2020.
Last year, GE paid almost $1 billion to buy ServiceMax, a company that sells cloud-based software that allows its service people in the field to do their jobs better. Think of it as practice management software for those working outside the office.
“It’s no secret that our services revenue is the bulk of our earnings and is a key part of what makes us successful,” Bill Ruh, CEO of GE Digital, told Bloomberg. “We’re moving away from where it’s all on paper to where it’s all becoming fully automated. Services are becoming a key part of the digital economy.”
Non-tech companies are getting better at making smart tech acquisitions, but if they don’t fully integrate those acquisitions into the GE business, eventually there will be problems.
“Technology should not be a division of a company. It should be integrated into every division,” Lion Tree CEO Aryeh Bourkoff, head of a New York investment bank specializing in technology, told The New York Times at the beginning of 2017. Like I said, I’ll be watching GE for some real integration.
If there’s a name on this list of seven stocks that would be considered a tech company it would have to be Netflix, Inc. (NFLX). However, Netflix started out by popping DVDs in the mail, so I think it’s fair to say that it’s equal parts tech company, media company, and entertainment company.
To entertain its customers, which has little to do with technology, it has to make and acquire content that customers will enjoy. That too has little to do with technology.
As for the technology itself, Netflix uses it to make its streaming service work efficiently and to analyze the viewing habits of its customers to keep them subscribing.
On the streaming front, it’s developed what’s called the Dynamic Optimiser compression system, software that reduces the amount of data used to view content while simultaneously improving the picture quality.
‘Whatever the best picture we can give you with whatever your bit rate is, that’s what we’re going for,” Todd Yellin, vice president of innovation at Netflix told the Mobile World Congress in March. “An HD picture for a lot less.”
So, if you want to call it a tech company, by all means, go ahead and do it, but ultimately, we all know that Netflix is nothing more than a futuristic video store using kick-ass technology to deliver a user experience far exceeding those BluRays we used to watch.
Courtesy Financial Engines
One of the founders of Financial Engines Inc. (FNGN), a California-based provider of financial advisory services, online and off, is none other than Bill Sharpe, the creator of the Capital Asset Pricing Model (CAPM), the financial model that explains the risk and reward of different investments. Sharpe won a Nobel Prize for his work in economics.
Anyway, Sharpe founded the company as a way to help individuals working for large businesses make better asset allocation decisions for their investments using the software he’d created while teaching at Stanford University.
Financial Engines' technology platform allows it to provide discretionary portfolio management and financial planning to millions of people across the U.S. As of December 31, 2016, it was managing $138 billion in assets.
The company’s portfolio optimization technologies allow it provide the best investment options for its clients but also to show them their portfolios might perform in different economic conditions, etc.
Although it provides both advice to clients online and off, it is the technology behind it that makes it a $2 billion market cap.
As investment management services become more commoditized and financial planning services become more valuable, Financial Engines has the technology to continue to grow both on the top- and bottom-line.
This article is by Will Ashworth of InvestorPlace. As of this writing, he did not hold a position in any of the aforementioned securities.
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