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Market Pulse
Thursday, November 30, 2023

An innovator’s dilemma, GPT-based stock picking and IPO Season

Welcome to this week’s Market Pulse, your 5 minute update on key market news and events, with takeaways and insights from the Sidekick Investment Team. 

Our stories this week:

  1. An innovator’s dilemma
  2. GPT-based stock picking
  3. IPO Season

Read the full Market Pulse below, or if you want to access it on the go, download the Sidekick app.

Adrian (Portfolio Manager), and the rest of the Sidekick team.

It’s important to note that the content of this Market Pulse is based on current public information which we consider to be reliable and accurate. It represents Sidekick’s view only and does not represent investment advice - investors should not take decisions to trade based on this information.

1) An innovator’s dilemma

When a new business model innovation (BMI) comes about, companies often face a dilemma: should they adopt it or stick with their existing approach? The decision is tricky because the potential benefits of the new model are often unclear at first. To reduce this uncertainty, companies often look to their peers for guidance - a phenomenon known as organisational herding.

A recent study[1] revealed some interesting insights into how disruption works by examining the American retail industry's adoption of e-tailing (selling goods and services through the Internet) among traditional brick-and-mortar retail firms. The authors analysed a unique data set, revealing the e-tailing BMI adoption decisions of 387 traditional brick-and-mortar, publicly listed, incumbent retail firms between 1995–2018.

The study found that incumbents were more likely to adopt e-tailing if their peers had already done so. However, the study also found that incumbents were not simply following the crowd but carefully evaluating the outcomes of their peers' e-tailing efforts.

In addition, the authors found that the importance of peer behaviours and outcomes varied over time. Early on (1995-2001), incumbents were more likely to be influenced by the adoption behaviours of their peers. However, later on (2002-2018), they were more likely to be influenced by the adoption outcomes of their peers. 

Finally, the study found that the identity of the adopted peer mattered. Top-performing peers' adoption behaviours and outcomes were more likely to influence incumbents.

The findings have important implications for stock picking in industries ripe for disruption. Consider how the auto industry's shift from internal combustion engines to electric vehicles mirrors the pattern seen in the study. Initially hesitant, major manufacturers like Tesla influenced competitors to join the electric vehicle market. Now, as electric vehicles become common and growth steadies, businesses and investors alike need to recognise these shifts and rethink their plans.

2) GPT-based stock picking

Since the public release of ChatGPT, a lingering question has captured the attention of both professional investors and individuals alike: Can it effectively pick stocks?

Matthias Pelster and Joel Val[2] from Duisburg–Essen University ran an experiment to study whether ChatGPT-4, with access to the Internet, is able to provide valuable investment advice and evaluate financial information in a timely manner.

They conducted the live experiment during the 2023-Q2 earnings announcement period to examine ChatGPT's ability to reliably assess earnings surprises and other news events. Earnings announcements were chosen as they represented significant corporate events, offering information-rich scenarios with complexities often challenging for investors.

Employing a live experiment was crucial to prevent biased outcomes, particularly since analysing ChatGPT's historical performance using past data might have inadvertently incorporated future information, potentially skewing results.

The findings indicated a positive correlation between ChatGPT's earnings forecasts and actual earnings, even when accounting for consensus forecasts. Additionally, the "attractiveness" ratings[2] of the stocks aligned positively with future stock returns.

The authors thus found that ChatGPT could be a handy tool for investors, helping with stock picks before earnings announcements or gauging overall stock appeal. Yet, the lingering question is, how long can this “edge” last? Stay tuned as we eagerly await next quarter's experiment results!

3) IPO Season

The US primary markets are poised for a flurry of activity, with several high-profile companies considering initial public offerings (IPOs) in the coming year. 

Reddit, the social media platform that fuelled the "meme stock" craze in 2021, is in talks with potential investors and could list its shares as early as the first quarter of 2024[3]. Rubrik, a cloud and data security startup backed by Microsoft, is also exploring an IPO early next year[4]. 

Kim Kardashian's Skims underwear label, valued at $4 billion this summer, is discussing strategic options, including going public[5]. And Shein, the Chinese-founded but Singapore-based fast-fashion retailer, has confidentially filed with US regulators for an IPO that could take place next year[6].

The renewed IPO activity is welcome news for equity capital market bankers who have endured a lacklustre year. Total US IPO volume is expected to only slightly surpass 2022, the country's worst IPO year in over a decade[7]. The anticipated IPOs of Reddit, Rubrik, Skims, and Shein could signal a revival of the IPO market and inject much-needed energy into the equity capital markets.


Please remember, investing should be viewed as longer term. Your capital is at risk — the value of investments can go up and down, and you may get back less than you put in.


[1] https://dx.doi.org/10.2139/ssrn.4487514

[2] https://www.sciencedirect.com/science

[3] https://www.bloomberg.com/news/articles/2023-11-27/reddit-leads-class-of-2024-us-ipo-candidates-testing-the-water?cmpid=BBD112823_MKT

[4] https://www.crn.com/news/security/rubrik-plans-to-pursue-ipo-in-2023-report

[5] https://www.axios.com/2023/07/19/kim-kardashian-skims-ipo

[6] https://www.bloomberg.com/news/articles/2023-11-27/fashion-retailer-shein-is-said-to-file-confidentially-for-us-ipo?cmpid=BBD112823_MKT

[7] https://www.ey.com/en_us/ipo/q3-2023-ipo-market-trends

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