Stock Picks | AI And EV Picks And Shovels Strategy – Volex?

14th Aug '23 by iwright7

7 comments 996 reads

Picks and Shovels investing harks back to the 19th-century gold rush strategy of investing in Pick and Shovel providers, rather than speculative gold miners, in the hope of becoming rich. Two of the current trendiest sectors are AI and EV, so it could be financially rewarding to identify UK companies supplying products to one of these sectors…. or better still both.

A fascinating podcast I listened to over the weekend helped in identifying a UK AI opportunity https://zeuscapital.co.uk/exclusives/5343806395. It featured Micheal Tobin, an ex Data Centre entrepreneur who mentioned (36mins in) that in his recent AI discussions with Google, they mentioned that adding AI (Google Bard) to the Google search engine will consume 17x more power for every search. This means that companies adopting AI will need much higher capacity data centres and with this all the associated infrastructure (Picks).

Enter un-trendy Volex (LON:VLX)) who in their recent trading update mention new customer wins… This includes increasing demand for Volex's next generation of high-speed cables for data centres, due to the growing market for artificial intelligence applications…

Not only do Volex make the high-speed Data transfer cables, but they also make the electrical cords that are needed to power the servers. Both products will be necessary for AI adoption. See for more background…. https://www.volex.com/markets/complex-industrial-technology/data-centres

What about a EV Shovels opportunity? Well £VLX are integrated into this too with last year’s EV sales rising a third to £110M. Volex manufacture grid cords and charging couplers for TELSA. Recently 7 other US car companies including Ford and General Motors announced they will be adopting the TELSA charging coupler design from 2025. In a rather dull AGM hosted by Investor Meet Company, Volex say that they; “See (couplers) as a great opportunity”.

So Volex should be well placed to adopt Mark Twain's advice: “When everyone is looking for gold, it's a good time to be in the pick and shovel business”.

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BnB

14th Aug '23

Well yes, I suppose so. But if you want picks and shovels data centre infrastructure suppliers then have a look at the chart for Vertiv Holdings, which is a data centre pure play. That’s not to say Volex is a bad company. I own a good slice and have faith in the investment.

epo001

Levis jeans too, at least anecdotally. The point being that people on the spot selling essential supplies did better than their customers who were undertaking speculative prospecting. The suppliers 'edge' was being on the spot and having a captive market.

If it is a Tesla design then VLX won't have a monopoly and can be easily undercut by better resourced competitors who are closer to the end user. This also deprives VLX of pricing power.

VLX appears to be a sound business but I don't find this line of argument convincing.

Cuddlesticks

I bought back into Volex (LON:VLX) quite recently. To temper my enthusiasm before buying I force myself to write at least three upside and downside risks.

Four reasons to buy:

Proven management capability having successfully turned around a failing business to make it a growing (FY23 11% organic revenue growth), profitable and cash generative.
Through Nat Rothschild’s 28% holding management are aligned with shareholders. This is also evidenced through a growing dividend and fully engaged investor relations
VLX has successfully grown a niche for being a low cost, reliable, high quality producer of cables with global production capability and a resilient supply chain. This supports sales to the largest customers who both provide and need scale
By gaining exposure to EV, data centre cables and the US defence sector, VLX has demonstrated the ability to identify and exploit new markets and now benefits from exposure to new secular growth areas.

Four reasons not to buy:

As a manufacturer, capex expenditure is high both to develop products as well as to maintain and grow production facilities. This sucks up significant cash flow and limits operating margins to less than 10%. Recently VLX has had to invest heavily to pivot its supply chain from China and to develop next generation data centre cables. It now seems to be through this capex peak.
VLX is exposed to cyclical end markets e.g. at 36% of revenue cables for domestic appliances is still the largest business and reported flat growth in FY23. Although fast growing, EV cables are much lower margin whilst datacentre/cloud providers are reporting slowing growth with enterprise customers ‘optimising’ IT/cloud spend
Despite the high level of capex VLX has had to make acquisitions to achieve its strategic revenue target of $1.2bn sales by FY27. VLX now needs to successfully integrate the newly acquired Turkish businesses. It’s not clear how often it can ‘repeat this trick’ and there is a risk of additional shareholder capital being required for further M&A
15% of revenue from one EV customer (FY23 Annual Report)

Revs8

I recently bought into Volex (LON:VLX) thanks to analysis from Paul and chart analysis from another member. It is now my largest holding. Aside form the valuable comments below, the chart and SP looks set to go much higher. HSBC's PT looks ambitious but the recent breakout has a PT of 450p by my calculation. I also believe we are in wave 3 (where buying becomes emotive) if you like Elliott wave theory.

iwright7

epo,

The above map shows Volex sites in 22 countries. The most recent acquisition is in (low cost ) Turkey, so the Volex has no problem competing locally and on price. In fact 44% of its annual sales are in the USA, so Telsa etc are already comfortable with supply. There is likely to be a trend to near-sourcing away from China too.

You are right to look for the negatives that will hinder growth, and I would say that the greatest risk is the high reliance on consumer cables.

The biggest opportunities lie in growth markets such as AI and EV, so its a case of assessing Volex's capability and likelihood of success in these expanding markets. The fact that Volex already scores well for a basket of quality metrics (Q = 89) and is cheap, points to risk to the upside.

Silver Moon

15th Aug '23

TELSA, not Tesla? I figured this out the other day, didn't look further as my focus is on Volex (LON:VLX) which I hold. Investor sentiment is everything. Having previously held, I sold at Revs8 ' Wave 2' and will be watching out to catch 'Wave 3'.

AI and EV Picks and Shovels Strategy – Volex?

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Iwright7

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