Investing in Digital Transformation
Technology has never been more important than it is today. In a pandemic plagued world, individuals create their livelihoods from their makeshift offices and work to keep business moving. Travel companies (airlines, cruise lines, hotel booking agencies, to name a few), is just one industry that has experienced significant loss in the fall out of our current economic era. They are not alone, and businesses are being forced to adapt. The digital transformation is underfoot, innovation is at the for-front and the participants are at risk of going bankrupt. All the while, investors hold the ability to benefit from these new secular trends.
Industries of Digital Transformation
It would be foolish to think there is an industry that will not be affected by the current transformation happening. Telecommunications, utilities, transportation, automotive, culture, healthcare, financials: you name it. Industries are evolving and it is being driven by innovators. Elon Musk created Tesla to provide consumers a more cost-effective electric vehicle. In the wake of his success, the market now sees more companies developing their own technology to improve and compete for market share in a brand new automotive market place. Away are the days of Ford and Toyota, who have been slow in adopting and transitioning to newer technology and consumer demand, allowing opportunities for Chinese EV companies such as Xpeng, and NIO Inc. to capture their own share of the marketplace.
Companies like SpaceX are innovators of technology. Aside from making trips to space affordable, they are making strides in pushing telecommunications forward. The development and deployment of ‘Star Link’, (low orbit satellites), offers internet and communication to areas of the world that tend to be remote and often are left without the same services provided to those in major cities. Imagine being able to provide internet for the millions of individuals all over India who currently live without. The idea of this technology and what it can do, will pave the way for other companies and entrepreneurs to capitalize on this movement. As an investor, these changes provide us with opportunities to generate returns that exceed those of an index.
Looking Beyond “Stay At Home” Stocks
If you pay any attention to the financial news then you should be familiar with the phrase ‘stay at home stocks’. I find the best example of these opportunities ZOOM. The video conferencing company quickly became a ‘must-have software’, as businesses were forced to close doors on in-person meetings, and employees were pushed to work remotely. The likes of “WebEx” and “GoToMeeting” had limited capabilities and could not provide the level of service and remote video conferencing needed. Enter Zoom, who quickly signed big-name companies like HSBC bank, and large tech firms like SSNC, leading to their sharp increase in stock price. Or take a look at The Antenna Company, founded to commercialize a new, innovative, “geometry based” antenna technology and now thriving as one of the companies playing a key role in the fast-growing digital infrastructure.
Gaming, e-learning and healthcare
‘While Stay At Home’ stocks like Netflix and Roku have seen great growth, there are other areas of the market often overlooked, such as gaming. Companies like ‘EA’ and ‘Activision’ have seen their share prices climb over 70% since February. As kids and adults alike look to take their minds of the current environment, this untapped industry is full of investment opportunities. Look past your large brand name companies, and you will find names hardly talked about. Unity (U) is a new security that just went public, hosts a huge platform for game developers, and allows them to sell their games directly through their store. Or GLUU, which has been trading for years, who creates and sells free-to-play mobile games. These companies only showcase a fraction of the opportunity as we see shifts in consumer demand and interactions.
Remote learning or e-learning is another area offering investors opportunities for outsized returns. K12 Inc LRN, boasts being a technology-based education company, and a leading national provider of proprietary curriculum and educational services created for online delivery to K-12 students. With an expected earnings growth rate for next year of 52.8%, this is one company making an impact in our digital transformation era. Look past the ‘growth’ of what one company is doing and think about what it could mean for the future of e-learning. Think about all of the online learning enterprises, and the massive amounts of user data being captured. This enables those platforms to use machine learning algorithms that can enhance and personalize the content for each individual.
If education is not your cup of tea, then look to the healthcare industry that is making moves to provide in-home visits, remote! As hospitals have (potentially) become overrun with the sick, doctors have had to find alternatives for delivering regular checkups and inspecting that irritating rash you have had for the last month. One participant in this field is Teladoc, a healthcare company, providing services that include telehealth, medical opinions, AI and analytics, and licensable platform services. Being able to see a doctor, be treated, and obtain prescriptions, all via a remote meeting has changed the way health care will be provided forever.
Think Outside of America
While the returns of US based equities has provided greater returns than those of the EMEA, APAC, and EURO markets’ this does not mean there are not opportunities outside. Amazon (AMZN) is very well known for being the ‘go-to’ market place for everything, and it would be hard to find an individual who has not heard of them. What how about AliBaba and Sea? AliBaba is the Chinese version of Amazon and Sea the Amazon of South-East Asia. A little over a year ago, AliBaba went public in the United States, and since, they have seen their stock price increase over 200% and Sea’s stock is up a staggering 390% since January 2nd 2020. Or how about ‘MercadoLibre’? This Argentine company hosts their own online market place and is considered the ‘Amazon’ of South America. These companies who exist, server clients in markets many investors do not think about day to day, and offer opportunities to those who are willing to explore, and step outside if their domestic bubble.
As an investor, it is wise to explore companies that are leading their industry, and sometimes the companies with the best edge and the most market share are not the ones closest to home. Many times, you will find great companies, driving innovation in another part of the world.
In Short
The world was rapidly thrusted into a completely new way of life and living. The new ‘Normal’ is still being defined as individuals around the globe continue to live their daily lives. This is an era where new opportunities are plentiful and companies are looking to capitalize on providing new services and solutions for consumers who are still demanding more. Look for the companies developing the technology, look for what industries/ consumers/ businesses will benefit from the technology being created, and it is very possible to find those winners who can generate increased returns.
About the author
Philip van Wijngaarden is a partner at private equity and venture capital firm Ramphastos Investments. He loves working with highly motivated entrepreneurs who are determined to dominate upcoming and innovative industries. He has been involved in many start-ups and scale-ups in a multitude of industries like aviation, telecom, fintech and gaming. Philip is a sports enthusiast who practices athletics, skiing, football, surfing, padel and fitness. He started investing in the stock market at the age of 16 and loves the search for the future market leaders in newly emerging secular growth trends.
