YWR: 5 Silicon Valley Start-ups for the price of 1!
Or, why you need a J-Corp, but just don't realise it.
Are you going round in circles?
Having a hard time investing in new stock ideas?
Is it always one thing or the other?
Let me guess.
Software looks cheap but it might be a value trap and could all get disrupted.
Semiconductor related industries are growing, but getting expensive and it could be a bubble.
Energy stocks are doing well, but it could just be a cyclical boost from the Iran war and structurally oil is in decline.
Refineries are minting, but it’s all from the Iran War and how much of a valuation do you put on something which has a binary outcome and could end at anytime?
Real estate has gone nowhere, but then who really needs all these office buildings anymore?
Consumer stocks are on the lows, but maybe consumers are getting structurally disrupted by AI and robots.
It goes on and on.
Either the company is expensive and in some narrow growth area, or it is cheap and getting disrupted.
The problem you are facing is that we are in a time of widespread disruption and these are all Western style H-Corps.
‘Hierarchical’ Companies.
The Western corporate model is ‘focus’. Focus on an industry, business line or process and just do that. If the company expands into a new unrelated industry it is spun off to create ‘shareholder value’.
So you get very focused companies, with managers and employees highly specialised in one industry which is either doing well, or it is not. And for the companies not doing well, it is hard for them to know what to do. It’s not in their DNA, or expertise, to expand into unrelated industries.
Because then they would start to be a conglomerate.
And conglomerates get discounts.
Except maybe a conglomerate is what you need right now.
Maybe in a world of rapidly changing technologies and geopolitical stress the Japanese style conglomerate, the J-Corp, is what you need.
At least that’s a view I’m coming around to.
J-Corps are different from H-Corps.
H-Corps exist to create shareholder value.
J-Corps are built to survive. That’s why the history of many large Japanese companies can go back as far as the Meji Era (1860-1920).
J-Corps are permanent capital companies, which employ people directly out of college for life. Employees are paid on seniority and bonuses based on the performance of the overall company, not personal performance. Usually, the shareholding is tightly controlled by related companies and the bank financing is also from related companies (keiretsu structure).
Most J-Corps are built around manufacturing, but what they manufacture can be very diverse. TOTO manufactures toilets, but also ceramic chucks for semiconductors. Sony is the same. It makes optical sensors, video games smart phones and speakers, plus makes movies and runs a bank.
It seems weird to do so many different things until you put yourself in the shoes of a Japanese company.
“Hey guys, we all have jobs here for life, but as you know our traditional business lines are in trouble and we aren’t growing anymore. So let’s all huddle together, come up with some good ideas and figure out how to adapt and keep the company going.”
So everyone figures out how to take the manufacturing and process skills from their existing products and apply them to something else. Which is why over time we have arrived at this state where Japanese companies do so many different things.
Everyone is on the same team and has to make it work. Nobody can jump ship to a competitor because it’s hard to get hired except directly out of university. And the company is committed to you and not going to layoff everyone so you actually have loyalty to the company and want to make it work.
This is very different from what happens at an H-Corp under stress.
We’ve always know Japanese companies do too many things, but not why they do so many different things.
This J-Corp model is built for survival and adaptation, and I think that’s why my gut keeps coming back to Kawasaki Heavy Industries (7012.JP), when it goes against all of my stock market training. And it’s why as I kept thinking about Kawasaki and questioning why I liked it when it looks like a mess and is hard to model, I eventually found David Oks great article “Why Japanese Companies do so many different things”, which is really a deeper analysis of industrial organisation.
But studies of “industrial organisation” are for another day.
We are here to make money.
And I think Kawasaki Heavy Industries looks interesting.
This isn’t a 5x idea.
This isn’t an inflection point idea.
It’s probably a 1x idea.
It’s something that just works over time. An investment which survives. And in this day and age that might be how we should look at things.
But if I wanted to hype it a bit I’d say Kawasaki Heavy is 5 (actually more) Silicon Valley start-up mega themes wrapped into a Japanese industrial conglomerate.
Yes, it’s a conglomerate. But because it’s a conglomerate it has the existing manufacturing facilities, technical expertise, financing, distribution, brand and customers to execute on long-term themes which will play out over years with lots of disruption and chaos along the way.
And like a Silicon Valley start-up they just did a $600mn capital raise to accelerate investment into these mega-themes. Except, unlike a Silicon Valley start-up the market of course punished them for this and the stock has sold off.
This 5 in 1 Silicon Valley mega-theme start-up trades at 20x March 2027 expected earnings (I’ve included my earnings estimate model at the bottom of the post).
Kawasaki Heavy: 5 Silicon Valley Start-ups for the price of 1.
