Discovery, Dispatch, Defence and Data: how digitalisation is driving long-term technology growth
The coronavirus pandemic has rapidly accelerated the digitalisation of the global economy. Lockdowns meant the world had to rapidly adapt to be more digitally interconnected than ever, and this environment drove a significant shift in demand across a plethora of sectors underpinned by technology - from entertainment and retail, to technology services and cyber security.
Even with economies re-opened and restrictions eased, the backdrop for these increasingly digitally driven industries continues to flourish and provide attractive, long-term growth opportunities during a period of short-term volatility for the wider technology sector.
We have identified key areas within the digital economy which are set to contribute to long-term growth for a global technology portfolio - discovery, dispatch, defence and data. Together they are creating a widespread pool of investment opportunities across the entire value chain, as digitalisation becomes an ever-greater part of our lives.
Below we examine these areas in more detail, examining what we see as some of the strongest long-term investment opportunities.
‘Discovery’ is all about how consumers search for, and identify products and services, and how businesses attract new customers. COVID-19 was responsible for a boom in e-commerce as lockdowns meant that a greater number of people than ever before were shopping online. This created greater opportunities for online advertising, and for companies operating in the social media space.
This has proved highly beneficial for many firms, particularly large corporates with vast international customer bases who are able to utilise growing digital capabilities, and the underlying technology providers, to better engage with their clients online.
Among the companies helping brands to harness social media and the internet more broadly is Hubspot, which offers tools for businesses to gather and analyse data and to help convert leads into sales. Its latest earnings figures showed a 47% year-on-year jump in revenue in the third quarter (Q3) of 2021, as small and medium-sized businesses increasingly scaled up their digital operations in the wake of lockdowns.1
Sprinklr is another company helping businesses manage their social media channels, and it saw its own Q3 revenue jump by 32% year-on-year. 2 The bulk of that expansion is made up of subscription growth – and such recurring revenue streams can be highly attractive for investors seeking some degree of potential future earnings’ visibility.
Another long-term theme of digitalisation is the shift from physical cash to electronic payments, as dealing with the former proves increasingly impractical. Clearly, the adoption of e-commerce has already driven the requirement for digital payment networks, but card-based or mobile-wallet based transactions, such as Apple Pay, are becoming the preferred option for all sizes of expenditure in physical shops. This can range from large one-off purchases, to weekly grocery shops down to daily coffee and newspaper purchases. The acceleration in the adoption of e-commerce during the past year due to the pandemic has broadly been positive for the providers of digital payment solutions.
While we expect revenues to grow as shoppers continue to return to the high street, online sales are likely to remain strong. The arrival of Omicron, the latest coronavirus variant stirred up further uncertainty and put activities associated with travel and leisure in doubt - but we believe the pandemic has accelerated the scale of opportunities for payments providers.
Some debit and credit card providers such as Visa are unlikely to have benefited fully yet from the reopening of economies after lockdown. Visa is expected to receive a boost from increased international travel when new restrictions ease, and its long-term growth drivers normalise. Revenue recorded by payments’ companies fell in 2020 because of the pandemic, but McKinsey projects a return to historical mid-single digit growth rates in 2021, in tandem with increased adoption of electronic and e-commerce transaction methods.3
Meanwhile, Fidelity National Information Systems is an innovative solutions provider, specialising in financial technology (fintech); it is favourably placed to take advantage of the growing demand for international digital banking capabilities with its HORIZON platform, which offers a powerful and seamless service across all major browsers.
Complementing this is Global Payments Inc., a fintech company which enjoys a multitude of partnerships with high-visibility and technically astute multinational clients, facilitates cryptocurrency processing and has an ambitious growth strategy as seen by its recent acquisition of commercial payments company MineralTree.4
Cybersecurity is also a critical issue that has come increasingly under the spotlight as more people work from home and more transactions are conducted online. For example, cyber security company Tenable reported a 23% rise in Q3 revenue, citing “unprecedented demand” as more companies move to cloud-based computing.5
Darktrace, the UK-based cyber security business also performed strongly in 2021 following its IPO early in the year. Palo Alto Networks, conversely is a more established cybersecurity provider which, with its comprehensive suite of products, is well placed to benefit from the inexorable shift to remote working, as the post-pandemic working environment looks likely to retain at least a hybrid approach for office workers for the foreseeable future.
Finally, Rapid7 is regarded well by analysts due in part to the global rise in demand for its penetration testing services, a market which is under increasing focus for businesses keen to identify any weaknesses and prevent costly hacks and data leaks which damage both bottom lines and customer perception, as well as needing to fulfil growing regulatory and due diligence requirements.6
‘Data and enablers’
‘Data and enablers’ together refer to companies that provide technologies or services that help their customers adopt a digital ethos.
IT services companies, such as Endava and Globant, have enjoyed good growth as businesses undergoing digital transformation seek help from experts to hone their digital strategy. We have also seen good potential investment opportunities in companies exposed to the digitalisation of the back office, such as Workday and Paylocity, which handle services such as payroll processing and human resources management. In November, Workday announced a 20% rise in third-quarter revenue year-on-year while Paylocity reported a 34% jump in revenue for its fiscal first quarter.7
As businesses resume hiring post-lockdowns and the job market improves, they may need to navigate changing employee expectations as well as new legislation for employers. A report by Paylocity and Deloitte recently highlighted how automating certain processes can be more efficient in this new working environment, saving businesses time and money.8
Companies that were traditionally offline need expertise from third-party specialists to compete in the new environment with ‘digital natives’; that is, companies that were originally designed to operate online.
New Relic, for example, is a cloud-based platform that allows companies to collect, store and analyse data in real-time. This helps firms to better understand a customer’s journey on their website and build on that learning to potentially encourage more people to make a purchase. For many companies this type of service has gone from being ‘nice to have’ to a ‘must have’.
Similarly Activision Blizzard, one of the pioneers of massively multiplayer online role-playing games (MMORPGs), has performed well on the back of Microsoft’s acquisition at a 46% premium to the prevailing market place. This evidences the growing acknowledgement that gaming and leisure is not only an exciting long-term growth opportunity accelerated by the pandemic, but also reflects a continuing and compelling shift in the popularity of online gaming. The trend for digital downloads, subscriptions and micro-transactions can provide a steadier stream of revenue than traditional console hardware releases - with less of the potential supply chain backlogs.
The reopening of economies has however brought its own set of issues including supply chain bottlenecks, labour shortages, inflationary pressures and resurgence of the virus in some areas. But we continue to believe that the opportunities for a global technology portfolio, driven by the long-term themes of the digital economy remain intact.
While the COVID-19 pandemic accelerated the digital transformation for many companies, it has been a long-term structural trend, with new opportunities that will continue to develop over time as new technologies and consumer trends emerge.
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