GSV's weekly perspec!ve on Growth, Innova!on + Inves!ng… from A Round to Apple Inc. a2apple.com 2018… Hot and Bothered Michael Moe, CFA | Luben Pampoulov | Li Jiang | Nick Franco | Suzee Han | Emily Ha December 31, 2017 It’s not nice to fool (with) Mother Nature! Hurricanes, earthquakes, wildfires, and extreme weather all contributed to a World that to many seemed out of control in 2017. Hurricane Harvey in Texas and Louisiana caused $190 billion in damages. Hurricane Harvey in Hollywood caused fatal damage to predatory male behavior and was the catalyst for Time’s “Person of the Year”, the #MeToo movement. If evidence was required to show that money doesn’t buy happiness, exhibit A would be a soaring Global stock market, which we accurately predicted last year. Exhibit B would be a 17-year low in unemployment. Exhibit C would be an economy that had its fastest growth since the New Millennium. Exhibit D would be the new tax bill, which saves the Important disclosures are on page 68 1 average tax payer $1,600 and lowers the top corporate rate from 35% to 21%. Exhibit E would be the stunning $2 trillion increase in U.S. homeowners’ value in 2017. Exhibit F would be J. Paul Ge"y’s character in All the Money in the World. The final exhibit would be that despite overwhelming economic prosperity, large segments of the popula!on are in uproar about almost everything. But in par!cular, over our reality show President. Especially irksome to the “Opposi!on Party” (which o#en includes his own Party) are his early morning tweets that tweak adversaries, with Senate Minority Leader Chuck Schumer calling him a “clown” and North Korean leader Kim Jong Un nicknaming him “Rocket Man”. Whether President Trump is crazy like a fox or crazy like Fox News is not yet obvious. But what is clear is that the World is paying a"en!on. Interes!ngly, despite the hysteria, President Trump’s approval ra!ng is essen!ally where President Obama’s was a#er the first year of his presidency. Two of the most overwhelming shi#s of power have an undeniable common denominator — investment in educa!on. President Xi gave a four hour long speech to the Chinese Communist Party’s 19th Party Congress in October, and approximately 25% of it was devoted to the importance of educa!on as a compe!!ve weapon. In fact, the two largest market capitaliza!on educa!on companies in the World are from China and neither are twenty years old. The Woman Power movement has hit a !pping point with female leadership emerging in every segment of society. The seeds of this wave were sown thirty years ago when the number of women in universi!es started to exceed men. Knowledge is in fact power. And in a knowledge based economy and Global marketplace, it makes the di$erence for not only how well an individual does, but also how well a company and a country does. Important disclosures are on page 68 2 GENDER FLIP: U.S. COLLEGE ENROLLMENT Percentage of Females Versus Males Enrolled in Post-Secondary Educa!on in the United States 58% 55% 56% 56% 57% 57% 56% 57% 54% 52% 53% 48% 46% 47% 45% 42% 44% 44% 43% 43% 44% 43% 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 (p) Men Women Source: Na!onal Center for Educa!on Sta!s!cs Given the strains on Mother Earth caused by Global growth and the Millennials’ hyper- concern for protec!ng the planet, Sustainability became the World’s greatest innova!on challenge. It’s not just about being green. It’s about what a business’s mission is. It’s about wellness and water. Hence, companies that embrace this challenge and come up with viable strategies and solu!ons will thrive. But those that conduct business as usual will be in peril. A likely vic!m of the enormous power and influence it has achieved is the tech industry, which now boasts the seven largest market capitaliza!on companies in the World. Moreover, tech is also the Mother of the Mother of all disrup!ve forces… ar!ficial intelligence. Anxiety, depression and an!-social behavior linked to addic!on to smart phones and social media are only “fuel to the fire” to “techlash”. Today, Apple has a market value of $868 billion and a P/E of 14.3x. But it is growing earnings at over 10% per year. Hold P/E constant and assume growth of 10%, and Apple will hit the trillion dollar mark in the Summer of 2019. But it will be a photo finish with Alphabet, which would cross the line the Fall of 2019. Important disclosures are on page 68 3 RACE TO $1 TRILLION Company Market Cap Growth Rate* P/E (NTM) Timing to $1T $442B 30% 26.0x Q1 2021 ! $563B 30% 145.6x Q1 2020 $868B 10% 13.9x Q2 2019 $512B 30% 26.6x Q2 2020 $731B 20% 25.2x Q3 2019 (Alphabet) ! $486B 40% 36.4x Q1 2020 Source: Capital IQ, Yahoo Finance, GSViQ, GSV Asset Management *GSV Es!mate Quietly, the likely winner for the first public company to reach one trillion isn’t a tech company. Other than the investment banks who have been scratching and clawing to be an underwriter for its IPO, the company that if it went public today would be twice as large as Apple is unknown to most of the World. In 2018, the Saudi Arabian Oil Company a.k.a. Aramco is targeted to go public with an es!mated $2 trillion (that’s trillion with a “t”) market capitaliza!on. The expected “float” or amount sold to the public is expected to be 5% of the company or $100 billion. For comparison, the previous record for proceeds from an IPO was Alibaba’s $25 billion. In 2018, Silicon Valley will con!nue to innovate, accelerate and consolidate. Technology is all about dispropor!onate gains to the leader in a category, with “pla%orms” evolving rapidly, filling in category and product maps. Important disclosures are on page 68 4 TECHNOLOGY PLATFORM ARMS RACE � - Leader/Compe!!ve ⏳ - Emerging/Developing ❌ - Not Compe!!ve/No Capability 1 (Google) ! ⏳ � � ⏳ ⏳ � Invested in ❌ ❌ ❌ Phone Pixel iPhone Ice (rumored) Lumia Galaxy phone maker Meizu ⏳ ⏳ ⏳ Opera!ng � � � Tencent ⏳ Yun ❌ Windows ❌ Android iOS Alexa Opera!ng Tizen Opera!ng system Phone 8 System System ⏳ ⏳ � ⏳ ⏳ � � App store Amazon App Facebook for Tencent App Windows Samsung ❌ ❌ Android iOS Store Developers Store Apps Galaxy Apps � � ⏳ ⏳ � Home delivery Google ❌ Amazon ❌ Stake in ❌ ❌ Thru Delivery Major stake Express Prime/Fresh Ele.me Hero, Swiggy in Ele.me ⏳ Transport/Self- � � � Self-driving driving Waymo, ❌ ❌ Investments ❌ ❌ ❌ Investments (project stake in Ly" in Gojek, Ola in Ly", DiDi technology Titan) ⏳ ⏳ � Voice � � � Wechat � Working on Samsung ❌ ❌ Google Home Siri Alexa Speech Cortana Automa!on Jarvis Smart TV Recogni!on � � FB/ ⏳ ⏳ ⏳ � Gmail, ❌ Merssenger, ⏳ ❌ Stake in Investment in Social iMessage Wechat, QQ YouTube Instagram Tencent Snap Whatsapp � � � � ⏳ ⏳ Music ❌ Tencent ❌ Thru ❌ YouTube Apple Music Prime Music Music, Milk Music Mul!Choice Spo!fy stake SA � ⏳ � ⏳ ⏳ ⏳ � � Google; AWS, JV with New Samsung Stake in Educa!on iTunes U, Facebook Microso" ❌ Google Amazon Oriental; Educa!on Udemy, iPad Groups Educa!on Educa!on Educa!on VIPkid Solu!ons Brainly ⏳ ⏳ � ⏳ � Fitness/health ❌ ❌ Microso" ❌ ❌ Google Fit Apple Watch WeRun Gear Fit Band � � � � � Thru Content YouTube Red Apple TV, ❌ Facebook ❌ ❌ ❌ Wechat Mul!Choice originals Apple Music Live Events SA, Olx ⏳ � � � � ❌ ❌ Facebook/ Large stake in ❌ ❌ Mul!ple Commerce Amazon.com Alibaba.com Instagram JD.com investments � � ⏳ � Google.com/ ❌ Facebook ❌ ❌ � ❌ News News app Wechat/QQ Google News Feeds � ⏳ � � � ⏳ ❌ Messenger/ Windows ❌ ❌ Messaging Hangouts iMessage Wechat/QQ Socializer Whatsapp Live ⏳ ⏳ � ⏳ � � ❌ LinkedIn, Samsung ❌ ❌ Collabora!on G Suite/Docs iCloud Workplace Wechat Yammer Square Important disclosures are on page 68 5 1 (Google) ! � � � � Minor stake Google Brain, ❌ Drones ❌ ❌ Powerbot ❌ ❌ Robots in Robot Google Home Warehouses VR7000 Entertnmnt � � Space Skybox/ ❌ Je# Bezos' ❌ ❌ ❌ ❌ ❌ ❌ Google Sky Blue Origin ⏳ � � ⏳ � ⏳ � Messenger ⏳ � Stakes in Ant Digital Wallet Google Amazon Wechat Microso" Apple Pay Mobile Samsung Pay PayU Financial, Wallet Payments Payment Wallet Wallet Paytm � � � ⏳ Ar!ficial � � � � Google Brain/ Internal Bing/Cortana AI Assistant ❌ Siri Echo/Alexa FAIR Aliyun AI intelligence AI group AI for Galaxy S8 � ⏳ � � � Corporate VC � � No VC arm ❌ Chan Microso" Samsung � Alibaba GV Alexa Fund but very Arm Zuckerberg Ventures Ventures Capital ac!ve � � � ⏳ Alexa � � Accelerator Google for Design and � Expected to � Accelerator Microso" Samsung ❌ Entrepreneur Development FbStart launch center GET in india Program with Accelerator NEXT s Accelerator in SW China Techstars ⏳ Digital � � � � ⏳ Jarvis (to ❌ ❌ ❌ Google Home Siri Alexa Cortana Bixby Assistant launch soon) � � � Connected � � ⏳ ⏳ HomeKit/ ❌ Samsung ❌ Smart Home Google Home Echo/Alexa Jarvis AI Home Hub Home HomePod SmartThings Division � � � � ⏳ � AR/VR Tango; Magic ❌ Spaces; Tencent VR Microso" ❌ ❌ ARKit Gear VR Leap Oculus VR Suite HoloLense ⏳ � ⏳ � � � � � Cloud services Internal Tencent Samsung ❌ Google Cloud iCloud AWS Azure Aliyun infrastructure Cloud Cloud ⏳ ❌ ❌ DeepMind; Working on Working on Blockchain ❌ ❌ ❌ ❌ ❌ ❌ invested in pla$orm with Coco Blockchain Intel Framework � � � � � Big data/ Applied � � Cloud Internal Amazon Grata Machine Azure/ ❌ ❌ Stream machine Machine group, and Machine chatbot Learning Cortana Compute Learning investments Learning pla$orm learning group Source: GSV Asset Management Leading ar!ficial intelligence expert Andrew Ng, the former Chief Scien!st at Baidu and co-founder of Coursera, stated that “AI is the new electricity.” AI will be the lifeblood that powers the next wave of technology companies. And it’s currently integrated in our daily lives in more ways than most realize. (Disclosure: GSV owns shares in Coursera) Important disclosures are on page 68 6 ARTIFICIAL INTELLIGENCE MEETS REAL INTELLIGENCE Innova!on Notable Examples According to Business Insider, as much as 85% of customer interac!ons will be managed without a human by as soon as 2020.