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    1. The lifecycle of a green technology company

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    The lifecycle of a green technology company

    December 2021
    Alexander Whyte

     

    Green technology is our ticket to a more sustainable future but according to the International Energy Agency, 50% of the technology we need to reach the world’s net zero carbon targets is not yet commercially viable.

    Meanwhile the other 50% is spread across both rapidly growing, innovative businesses, and more mature, profitable companies. As a result, green technology businesses find themselves at various points on what we call the S-Curve. This creates a range of very different opportunities for investors.

    The S-Curve provides a framework for assessing almost every successful technology business since the first industrial revolution, with growth proceeding through three distinct phases – nascent technologies undergoing a burst of innovation, followed by exponential growth as mass adoption takes off, and finally reaching maturity.

    Exhibit 1: Technology: The S-Curve

    Source: J.P. Morgan Asset Management, November 2021. Image: Shutterstock

    Phase 1 – Nascent Technology

    The nascent phase is the most volatile end of the curve. A new and innovative company faces a particularly wide range of possible outcomes, and the valuation will reflect the probability of these occurring. For example, a business may be valued at $1 billion today if investors believe there is a 10% chance it could be worth $10 billion in the future – but that valuation still implies a 90% chance it will be worth nothing. So while there can be massive upside if things go right, there is a significant risk it may not.

    To move from the nascent phase to mass adoption, new technologies require a catalyst. In the green technology space, catalysts can include government initiatives, regulations, or consumer behaviour.

    A good example is hydrogen technology – is it the future of decarbonising transport? The answer to this question may well depend upon the actions of governments. Following the COP26 summit, the US government made some encouraging statements about their plans for green hydrogen, which boosted stocks in the space. However, there still remain multiple fundamental issues, such as the volume of green power needed to produce meaningful quantities of hydrogen. Therefore, predicting whether this will be an area of focus for future government support is a fiendishly difficult task.

    Those companies which do achieve mass adoption of their product can deliver windfall returns for early investors. Although it does not eliminate the risk of loss, diversification can be key to managing risk in this phase, as some technologies will simply never take off.

    Phase 2 – Mass Adoption

    Companies in this phase are those which have already hit their inflection point, leading to fast-growing revenues and a battle for market share.

    In the green technology space, electric vehicles are the most visible mass adoption technology right now. Tailwinds here include government incentives and targets (the UK’s goal of banning the sale of new petrol and diesel cars by 2030, for example), as well as the growing number of charging points and advances in battery technology. With such forces behind them, it’s little wonder the likes of Tesla are enjoying huge revenue growth. Surely, it’s just a case of investing in a theme enjoying exponential growth and watching the returns flood in?

    Not so fast. A technology theme may be thriving, but that doesn’t mean every company will be a winner. Far from it. In the mid-19th century, the railways were clearly set to be the backbone of Victorian Britain, but of the more-than 250 railway companies set-up, only a handful survived. In fact, a third of proposed rail tracks were never even laid. Some companies will be gaining market share, while others will see their costs spiral and profits suffer. Essentially we’re asking, who is going to be left standing?

    There is another way to approach this phase of curve. A common saying is: during a gold rush, it’s best to be the one selling shovels. One way investors can get attractive exposure to the electric vehicles theme is through semiconductor companies, such as Infineon, which supply the chips all electric vehicles need to operate. Whether it’s Tesla, Volkswagen or another company that comes out as the dominant producer, they will all need semiconductors in their cars.

    Phase 3 – Maturity

    Once everyone who wants an electric vehicle has one, the industry will reach the mature phase of its growth. People may change their car every few years, as they do with their smartphones, but exponential growth will be over.

    Wind energy is an example of a mature technology in the green space. Such businesses are no longer so reliant on government support, they generate predictable earnings streams, and many have high quality management teams. Wind farms often have power price agreements that can last for more than 25 years, which results in very stable cash flows.

    One such leader in offshore wind is Denmark-based Orsted, a company that generates strong returns from its various projects and has been highly successful in winning large tenders. As investors, we’re interested in what we’re paying for such consistent earnings. This is where company quality becomes even more important, as just small improvements in cost of capital can dramatically increase project values and share prices.

    Unlike early and mass adopters, pure economics is a larger driver of mature companies’ fortunes. We’re looking for attractive valuations, earnings visibility, and best-in-class management teams delivering profitable projects while reducing their cost of capital.

    In Summary

    Green technology isn’t just about trends, it’s about identifying the winners within those themes. For those companies which do grow to dominate the space, the rewards can be huge. Across the S-Curve, we focus on quality, valuation, and diversification – while also looking for the standout winners gaining momentum. Ultimately we aim to invest in the green technology companies that will power our transition to a more sustainable future.

    NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for institutional, wholesale, professional clients and qualified investors only, as defined by local laws and regulations.

     

    The views contained herein are not to be taken as advice or a recommendation to buy or sell any investment in any jurisdiction, nor is it a commitment from J.P. Morgan Asset Management or any of its subsidiaries to participate in any of the transactions mentioned herein. Any forecasts, figures, opinions or investment techniques and strategies set out are for information purposes only, based on certain assumptions and current market conditions and are subject to change without prior notice. All information presented herein is considered to be accurate at the time of production. This material does not contain sufficient information to support an investment decision and it should not be relied upon by you in evaluating the merits of investing in any securities or products. In addition, users should make an independent assessment of the legal, regulatory, tax, credit and accounting implications and determine, together with their own financial professional, if any investment mentioned herein is believed to be appropriate to their personal goals. Investors should ensure that they obtain all available relevant information before making any investment. It should be noted that investment involves risks, the value of investments and the income from them may fluctuate in accordance with market conditions and taxation agreements and investors may not get back the full amount invested. Both past performance and yield are not a reliable indicator of current and future results. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide. To the extent permitted by applicable law, we may record telephone calls and monitor electronic communications to comply with our legal and regulatory obligations and internal policies. Personal data will be collected, stored and processed by J.P. Morgan Asset Management in accordance with our privacy policies at https://am.jpmorgan.com/global/privacy. This communication is issued by the following entities: In the United States, by J.P. Morgan Investment Management Inc. or J.P. Morgan Alternative Asset Management, Inc., both regulated by the Securities and Exchange Commission; in Latin America, for intended recipients’ use only, by local J.P. Morgan entities, as the case may be; in Canada, for institutional clients’ use only, by JPMorgan Asset Management (Canada) Inc., which is a registered Portfolio Manager and Exempt Market Dealer in all Canadian provinces and territories except the Yukon and is also registered as an Investment Fund Manager in British Columbia, Ontario, Quebec and Newfoundland and Labrador. In the United Kingdom, by JPMorgan Asset Management (UK) Limited, which is authorized and regulated by the Financial Conduct Authority; in other European jurisdictions, by JPMorgan Asset Management (Europe) S.à r.l. In Asia Pacific (“APAC”), by the following issuing entities and in the respective jurisdictions in which they are primarily regulated: JPMorgan Asset Management (Asia Pacific) Limited, or JPMorgan Funds (Asia) Limited, or JPMorgan Asset Management Real Assets (Asia) Limited, each of which is regulated by the Securities and Futures Commission of Hong Kong; JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K), this advertisement or publication has not been reviewed by the Monetary Authority of Singapore; JPMorgan Asset Management (Taiwan) Limited; JPMorgan Asset Management (Japan) Limited, which is a member of the Investment Trusts Association, Japan, the Japan Investment Advisers Association, Type II Financial Instruments Firms Association and the Japan Securities Dealers Association and is regulated by the Financial Services Agency (registration number “Kanto Local Finance Bureau (Financial Instruments Firm) No. 330”); in Australia, to wholesale clients only as defined in section 761A and 761G of the Corporations Act 2001 (Commonwealth), by JPMorgan Asset Management (Australia) Limited (ABN 55143832080) (AFSL 376919). For U.S. only: If you are a person with a disability and need additional support in viewing the material, please call us at 1-800-343-1113 for assistance. Copyright 2021 JPMorgan Chase & Co. All rights reserved.

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