The Deepwater Frontier Tech Index (LOUP) aims to provide investors with exposure to themes that we will be talking about in three to five years. Go deeper.
This is a series of monthly posts providing an update on performance and sharing what’s on our mind in frontier technology.
Performance Update
LOUP was up 20% this month, compared to the NASDAQ (up 11%) and the S&P 500 (up 9%).
Month in Review:
Payment stocks in Deepwater Frontier Tech Index (LOUP) were strong in the month of November, up an average of 65% MoM based on the strength of the consumer and a shift in investor outlook for interest rates to remain stable in the foreseeable future given signs that inflation is cooling.
- Adyen (ADYEN.AS) +80%
- Block (SQ) +63%
- Shift4 Payments (FOUR) +56%
Over the past quarter, consumers have continued to defy higher interest rates and looming recession talk by continuing to spend, resulting in payment stocks surging in November. We expect the good news from the macro should continue, with Deloitte expecting holiday spending to surpass pre-pandemic levels for the first time. While the payment stocks in the Deepwater Frontier Tech Index are up meaningfully over the past month, we believe they can continue to move higher given they currently trade an average forward PE of 19x, below the Russell 2000 forward PE of 24x. Additionally, the payment group is growing earnings at 40% plus next year, well ahead of what we estimate is 10%-plus growth rate for the Russell.
One dynamic in consumer spending we are tracking is the growing use of credit through “buy now, pay later” options. Adobe reported consumers purchased $760M using the online “buy now, pay later” financing option on Black Friday, up 20% YoY. In other words, almost 8% of Black Friday spend was driven by “buy now, pay later.”
We are bullish on payments long-term, because consumers are moving away from traditional payment options to digital offers. That’s a trend that remains in its infancy.
What to know in AI:
AI represents 41% of the Deepwater Frontier Tech Index. The November chaos at OpenAI had the market questioning the trajectory of AI. Safety concerns and speculation of Artificial General Intelligence (AGI) were the reasons why Sam Altman was briefly ousted as CEO. Now that Altman is back with a more supportive board (which now includes Microsoft), the company will be more aggressive in its pursuit to commercialize AI, which means the speed of AI impacting our lives will quicken.
The Deepwater Frontier Tech Index is heavily invested in AI with 44% of the index weighted in AI implicated companies. These companies include: Taiwan Semiconductor Manufacturing Company (TSM), Advanced Micro Devices (AMD), ASML Holding (ASML), Applied Materials (AMAT), CrowdStrike (CRWD), Arista Networks (ANET), Adobe Systems (ADBE), Marvel (MRVL), Vertiv (VRT), SK Hynix (KRX), GlobalFoundries(GFS), Smartsheet (SMAR), and Palo Alto Networks (PANW).
While NVIDIA captures much of the investor attention around AI chips, we see more opportunity with these smaller companies given that they will likely grow faster than NVIDIA over the next five years.
How Can I Invest in the Index?
Deepwater partners with Innovator ETFs to offer the NYSE-listed Innovator Deepwater Frontier Tech ETF. The ticker is LOUP.
To learn more about how to invest, visit the Innovator website.