Ian Mortimer of Guinness Global Innovators explains that innovative companies can maintain a competitive edge which translates into superior financial and stock performance. That’s why assessing innovation is key when assembling growth stocks.
Innovative companies can maintain a competitive edge which translates into superior financial and stock performance.
That’s why we look for innovation as we assemble the universe of high-quality growth stocks for the Guinness Global Innovators strategy.
How do we assess innovation?
Innovation isn’t just about small-cap ‘tech’ companies. While there are many definitions, we see innovation as the creative application of ideas – and this can be found in virtually any industry, as is shown by the diversity of stocks held in the Guinness Global Innovators Fund. Here, we look at how two very different companies have used innovation to stay ahead of their peers.
Boeing’s continuous innovation
Large companies sometimes struggle to stay nimble and innovate with the necessary speed to remain a market leader. With its culture of innovation, Boeing has a proven history of adapting and improving its business.
In the years after the First World War, for example, when military orders were dramatically reduced, Boeing sustained its business by expanding beyond aircraft manufacturing and using its skills to make boats and furniture.
Boeing’s continuous innovation – and R&D spend of around $3bn a year – has seen it introduce a moving production line for its 737 aircraft, a method more commonly found in car production; increase production from 31 aircraft per month in 2005 to a targeted 52 in 2018; and use carbon fibre fuselages for their superior lightness, strength and capacity for higher cabin pressure, which leaves passengers less jet-lagged.
At the same time, Boeing is a well-run, quality company with a strong balance sheet. It has been generating returns above their cost of capital for many years, showing strong cash generation and the ability to create value.
Nvidia: the disruptive technologists
Nvidia began in 1993 as a computer graphics card designer. Its graphics cards became regarded as the best available for computer gaming. A major step was Nvidia’s invention of the graphical processing unit (GPU) in 1999. This charted a growth path into some of the most innovative corners of a wide range of sectors, far beyond IT. Recently, the adoption of the GPU into the automotive industry and data centres has led to further revenue streams as a direct result of product innovation.
Nvidia’s product upgrade life can be as short as four years, so continuous innovation is essential to avoid a product being superseded quickly. A good comparison is the mobile phone industry; for Nokia and Blackberry, missing the rise of the smartphone was their downfall. The product cycle is similar for chip designers, and the competition is unforgiving.
Today, Nvidia spans numerous innovative themes, such as self-driving cars, augmented reality, data centres and artificial intelligence. Nvidia’s innovation lies in the way it has developed quality technology infrastructure which many of the world’s future products and services may require.
Importantly, Nvidia has not forgotten to innovate within its core market, the computer gaming business, winning support for its new Pascal architecture chips. The company has regularly spent more than 20% of revenues on R&D and has spent $1.5bn over the last 12 months.
Nvidia’s persistent innovation at all levels has helped it deliver double digit earnings growth every quarter in 2016, with further growth seen in 2017, and the market has rewarded the company. What began from a single ground-breaking invention has led to a culture of continual innovation and a disruptive company with strong and profitable growth.
Investing in innovative companies
When selecting stocks for the Global Innovators Fund, we are not looking for the most innovative companies on the market. Rather, we want the best growth stocks where innovation is a success factor. We use a quality screen – looking for return on capital above the cost of capital, and balance sheet strength – to ensure our universe contains companies which have translated innovation into financial success. We also employ a value discipline to ensure we are not overpaying for future growth, recognising that hype can drive up valuations.
By passing these tests, Boeing and Nvidia have shown that as well as being good, innovative companies, they are also good investments.
The value of an investment and the income from it can fall as well as rise as a result of market and currency fluctuations and you may not get back the amount originally invested
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