Mad Hedge Technology Letter
May 15, 2023
Fiat Lux
Featured Trade:
(ACCELERATING TO PROFITS)
(TECH)
Posts
Two decades ago, iPhone didn’t exist — hard to believe — right? As it stands now, US consumers wouldn’t be able to survive an hour outside their house without one.
At least I wouldn’t.
Three decades earlier, no one even owned a computer.
Doesn’t that just mess with your head?
The first personal computer arrived about 40 years ago.
Today, we are hypnotized by our computers and almost unable to get away from them.
What does this all mean, John Thomas?
Intuitively and anecdotally, it feels like technology is progressing faster than ever.
Accelerating technology is the explanation of this driving force, which is aptly called the law of accelerating returns.
Computer chips have become increasingly powerful while costing less. That’s because, over the last five decades, the number of transistors—or the tiny electrical components that perform basic operations—on a single chip has been doubling regularly.
So give it to me in a nutshell, and what does it all mean?
According to the law of accelerating returns, the pace of technological progress—especially information technology—speeds up exponentially over time because there is a common force driving it forward. Being exponential, as it turns out, is all about evolution.
As this process plays out generation after generation, chaotically yet incrementally, incredible growth takes place.
Civilizations advance by “repurposing” the ideas and breakthroughs of their predecessors. Similarly, each generation of technology builds on the advances of previous generations, and this creates a positive feedback loop of improvements.
The big new idea is that each new generation of technology stands on the shoulders of its predecessors—in this way, improvements in technology enable the next generation of even better technology.
Because each generation of technology improves over the last and even self-corrects, the rate of progress from version to version speeds up.
This acceleration can be measured in the “returns” of the technology—such as speed, efficiency, price-performance, and overall “power”—which improve exponentially too.
As technology becomes more effective, it attracts more attention. The result is a flood of new resources—such as increased R&D budgets, recruiting top talent, etc.—which are directed to further improving the technology.
This wave of new resources triggers a “second level” of exponential growth, where the rate of exponential growth also begins accelerating.
However, limited paradigms won’t grow exponentially forever. They grow until they’ve exhausted their potential, at which point a new paradigm replaces the old one.
This suggests that the horizons for amazingly powerful technologies may be closer than we realize.
We’re only 23 years into the 21st century and the progress has been breathtaking—the global adoption of the Internet, smartphones, high-level robots, and AI that will replace everyone’s job so we can sip tea poolside.
We sequenced the first human genome in 2004 at a cost of hundreds of millions of dollars. Now, machines can sequence 100,000 annually for $20 a genome.
These are just a few examples of the law of accelerating returns driving progress forward. Because the future is approaching much faster than we realize, it’s critical to think exponentially about where we’re headed and how we’ll get there.
Clearly, not every company was built equally, and not every tech firm will be able to take advantage quickly of super shifts in technological prowess.
Unfortunately, harnessing new technology like A.I. absorbs capital, and lots of it.
Companies like Apple and Microsoft are almost $3 trillion and wield generous shareholder return programs.
It could be true that the richest will be able to find a path to supercharge business models with the newest tech.
I do believe in 10 years there will be only 7 tech stocks left on the public markets because they will dwarf in size anything that is even remotely less relevant.
Welcome to tech in 2023.
Mad Hedge Biotech & Healthcare Letter
June 17, 2021
Fiat Lux
FEATURED TRADE:
(VALUE CREATOR STOCK OPERATING UNDER THE RADAR)
(TECH), (AMGN), (ABT), (TMO)
There’s a wildly underrated and undercovered biotechnology stock despite its track record of creating long-term value and ability to outstrip its projected operational performance in the past years.
This stock is Bio-Techne (TECH).
Historically, Bio-Techne has reported impressively good margins, which could partly be attributed to the company’s incredibly strong intellectual property position.
While Bio-Techne originally concentrated on offering biotechnology solutions, it eventually embraced a diversification strategy thanks to all the dealmaking it has been doing over the years.
Back in the 1990s, Bio-Techne struck deals with promising biotechnology companies like Amgen (AMGN) and even Genzyme to acquire sections of their research departments.
Borrowing Warren Buffett’s expression, Bio-Techne’s value can be seen on the “owner earnings” it has been reporting. Thanks to a change in management in 2013, this sleepy high-margin company has been reinvigorated through various strategic acquisitions.
So far, Bio-Techne has three very active divisions.
It has its biotechnology division, which comprises 65% of its revenue and sells proteins, reagents, and antibodies right out of the freezer.
It has its protein platforms, which market instruments that push the use of the products sold by its biotechnology sector.
Lastly, it has its diagnostics sector that supplies equipment, such as those used for protein analysis, to other companies, including Thermo Fisher Scientific (TMO) and Abbott Laboratories (ABT).
Meanwhile, Bio-Techne has been making progress in stem cell research and Car-T immunotherapy, along with other kinds of cancer research.
Sales have been climbing steadily, increasing by an average of 15.7% over the last five years, with room for margins to pick up as Bio-Techne continues to integrate acquisitions.
To continue expanding its business, Bio-Techne recently shared its decision to buy diagnostics company Asuragen for $215 million.
Founded in 2006, Texas-based Asuragen develops and produces test kits for cancer and genetic carrier testing.
Estimated to contribute $30 million in revenue, Bio-Techne is actually paying only a mere 7 times its sales multiple—with the potential to jump to about 10 times as future contingent payments could boost the purchase price by an additional $105 million.
Even if that happens though, Bio-Techne will still be pumping sales at an extremely favorable multiple compared to its current multiple.
Another major acquisition of Bio-Techne is its 2018 deal with Advanced Cellular Diagnostics, which was executed to boost its diagnostics portfolio.
At the time, Advanced Cellular Diagnostics’ top line was already growing by 40% to 50%.
One of the most exciting products this acquisition added to Bio-Techne’s lineup is a tumor diagnostic test.
For context, current diagnostic tests are only 75% accurate. In comparison, Advanced Cellular Diagnostics’ test is 95% accurate. This makes the latter an extremely attractive product in the industry.
The company also has solid patent protection for new products focusing on gene and gene fragment probes.
Overall, the lineup from Advanced Cellular Diagnostics is estimated to bring in at least $50 million in additional yearly revenue for Bio-Techne.
The fact that it’s growing by 50% annually makes the acquisition one of the best buys of this biotechnology company.
Since being founded back in 1976, Bio-Techne has established itself as a steady value creator.
Needless to say, Bio-Techne is a highly profitable business, with earnings anticipated to increase by 15% annually.
Looking at the recurring nature of the company’s revenue, its consistent earnings, the potential of its Advanced Cellular Diagnostics purchase, and its prospects for more accretive acquisitions, Bio-Techne should be able to hold its mid-30s multiple to owner earnings.
Despite the pandemic’s effect on the biotechnology and healthcare sector in 2020, Bio-Techne still reported a 45% growth in its annual sales to reach $739 million last year.
So far, Bio-Techne is on track for its goal to become an over $30 million type portfolio. In terms of its five-year outlook, the company is targeting to reach $1.5 billion in the next few years.
Surprisingly, it’s still operating under the radar of the majority of investors, even in the biotechnology sector.
For biotechnology investors on the lookout for a value creator stock, it’s wise to keep an eye on Bio-Techne. Simply checking its bolt-on M&A strategy combined with its steady organic growth rate, this company has the potential to provide long-term returns.
