We have written many times over the years about the investment philosophy that forms the foundation for our growth investment strategies, a time-tested philosophy descended from the approach developed by Thomas Rowe Price, Jr. (1898 - 1983) and pursued profitably by him for several decades.
It is a philosophy based not only upon investing in well-run businesses but upon investing in well-run businesses benefitting from powerful ongoing developments in their industry or in society at large. To explain by way of a metaphor, if individual companies were ocean-going ships, we would be looking not only for well-built vessels with good leadership and crews, but for seaworthy ships which were also positioned within powerful ocean currents which would assist them in reaching their destination.
Periodically, we highlight a company which we believe exemplifies this philosophy.
Kornit Digital designs and manufactures high-definition digital printers and ink for textiles, used to print designs onto fabrics for the manufacture of clothing and other textile products, as well as onto finished garments.* Digital printing is transforming the textile industry and stands to benefit from many powerful "currents" driving greater adoption of the digital approach versus the traditional "analog" methods of textile printing.
Analog textile printing involves significant factory setup taking up lots of space and using costly equipment, a configuration which is optimized for large-batch production runs of several hundred or even thousands of garments or rolls of printed fabric. Once the operation is set up, it then becomes relatively inexpensive to crank out large numbers of garments, with the "cost per item" or "cost per print" going down as the batch size goes up.
Flexibility is very limited once the print run is set up: the process is optimized for the production of large numbers of the same design or pattern. Setting up and operating the machinery is complex, labor intensive, and time consuming, as is making any changes.
Digital textile printing, on the other hand, enables almost infinite flexibility. There is no complicated equipment to rearrange between printing one design and another: a digital printer can print a different design on every successive shirt, or every successive roll of fabric, without any changes to configuration whatsoever, in much the same way that your printer at home or at work can print a hundred different pages with different print or patterns on them, without any intervention from you in between each page.
Unlike the traditional analog approach, the cost of each print is basically identical to the previous print, with no reduction for volume. This means that, in terms of cost per print, it is no more expensive per shirt to print a run of five or of fifty shirts as it is to print a run of five hundred or five thousand shirts. While the traditional analog approach is economical for runs of many hundred or even thousands of garments or rolls, the analog approach is very un-economical for runs below a few hundred prints.
Additionally, the traditional analog print business uses toxic chemicals and enormous amounts of water, both of which create significant pollution -- to the point that the environmental regulations in most developed countries make such operations impossible, which is why most garment manufacture and printing is done in developing nations far from the markets where those textiles and garments will eventually be sold. Digital printing -- and especially the Kornit digital printers and ink -- are much more eco-friendly and do not produce toxic byproducts.
The strengths of the digital printing approach for printed garments and textiles should be fairly obvious -- as are some of the major industry and consumer trends which are increasingly playing to the strengths of the digital approach at the expense of the traditional analog methods. The radical changes which have transformed the retail landscape with the advent of e-commerce, Amazon.com, social media, and accelerated fashion trends (with shorter durability) all play to the strengths of digital textile printing.**
Whereas the older analog methods necessitated large bets on big runs of garments or textiles, often produced overseas with lengthy supply chains and significant amounts of time involved between concept and go-to-market, digital printing enables the economical production of smaller batches, with greater flexibility, produced much more quickly in order to take advantage of recent trends or developments, with much shorter supply chains (fabric or garments can be printed in the same markets where they will be sold).
The analog approach entails significant risk for retailers and other industry participants, making big bets on products well in advance, with limited flexibility to change once the large batches are produced and shipped to stores or warehouses. The digital approach enables much more experimentation with much lower exposure if something doesn't work out -- and with the ability to change "on the fly," almost instantly.
The major drawbacks to the digital approach have been quality, including the lack of ability to print on various fabric types or colors, as well as the number of machines and printing steps involved in the digital process itself. Kornit Digital's innovations include designing printers which combine the multiple steps that would otherwise require numerous machines and production steps, saving both time and money in the process. Additionally, Kornit's printers are able to handle types of fabric which other digital printing manufacturers cannot satisfactorily print.
We believe that Kornit is an example of the kind of well-run business positioned to take advantage of major "currents" that are driving the future of retail, and thus an excellent illustration of the kind of company we look for in our investment strategy.
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* At the time of publication, the principals of Taylor Frigon Capital Management owned securities issued by Kornit Digital (KRNT).
** At the time of publication, the principals of Taylor Frigon Capital Management did not own securities issued by Amazon (AMZN).
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