Identifying key secular trends that are underway in the economy can be a great way to ride investments that have a long run growth trajectory ahead of them. However, simply identifying these trends isn’t sufficient to drive long-term wealth. Being able to also identify businesses that have a unique position in these fast-growing markets to capture significant value and retain value is also equally important. However, at least making sure that you’re on the right side of these tailwinds can considerably help in identifying promising candidates and help ensure you are on the right side of growth.
The shift of on premise enterprise infrastructure to the cloud
This is probably one of the most fundamental secular trends that’s currently underway in the global economy. At its most basic level, deployment of cloud infrastructure and cloud applications allows enterprises to centralize the management of security, maintenance firmware and policy control for server infrastructure and applications. This provides major cost advantages and a significant reduction in premise system management by IT in being able to take advantage of the scale and standardization that come with delivering security, firmware and policy control over terabytes of compute.
The spoils in this area will be divided up between the infrastructure as a service platform players and those that can deliver hosted application as a service in the cloud. Gartner’s forecast suggests good growth for both categories of cloud players, with growth in global cloud through 2022 averaging between 23% and 26% per year.
Source: Gartner Cloud Report
On the cloud infrastructure as a service side, the spoils will really be shared between Amazon (AMZN), Microsoft (MSFT) and to a lesser extent Alphabet (GOOGL). While Amazon has the most dominant lead via its AWS platform on the infrastructure as a service side, Microsoft is rapidly making up ground as more conservative enterprises are deploying a hybrid model where certain infrastructure is maintained on premises while other instances are migrated to the cloud, an area where Microsoft has some advantage given its legacy on premise deployments of Windows and Windows Server. Google cloud remains a dark horse and is a fairly distant third place behind Amazon and Microsoft today, however Google Cloud is rapidly gaining share in certain verticals such as retail.
The cloud applications category will have a much broader set of businesses who are poised to benefit. With businesses wanting to consume software when they want and for the duration of time that they want, this is opening up a whole new set of business models, and the players that are particularly well placed to benefit are those that are delivering mission critical software to enterprises. What the cloud effectively does for them is enable them to extract significantly more value over an extended duration of time from a specific customer. Mission critical software is very difficult to substitute without causing major disruption to existing users and a massive loss of productivity which occurs during re-training of users. Key players that are poised to benefit from the shift to cloud applications include Salesforce (CRM) and Adobe (ADBE).
Salesforce effectively pioneered cloud-based customer relationship management or CRM. CRM systems are complex and critical to managing the sales pipeline and overall revenue generation. However, having an external vendor provide the management and delivery of CRM infrastructure provides major advantages for an IT organization. Nonetheless, once such a system is in, IT departments are loath to remove it given the massive loss of productivity and potential revenue implications that it will cause to sales and marketing. Adobe, with its content creation software for creative professionals, also occupies an essential role in marketing content creation and delivery for an organization. Like Salesforce, Adobe has also shifted its model to cloud based content delivery, which allows IT to not have to maintain such infrastructure yet still provides the essential tools for content creation in an organization to deliver essential digital engagement with customers.
The shift in physical payments to digital payments
Amazingly, even though plastic cards for payment have been around for what seems like decades, check and cash are actually the dominant methods of payment globally. In fact a couple of years ago Mastercard (MA) did a study where they estimated that digital payments only accounted for 15% of the addressable global payment volume, with cash and check being the predominant methods of payment. This notwithstanding, the inevitable trend is shifting towards completely digital payment for majority of goods and services in the economy. Carrying physical cash is not only inconvenient for consumers but also very costly for businesses. It typically requires the most productive employees to have to periodically count cash, replace cash and physically deposit cash. In fact estimates are that handling physical cash can cost certain businesses up to 10% of their turnover.
The most obvious beneficiaries of this trend to digital payment are the payment processors, Visa (V), Mastercard and American Express (AXP) all of whom have been experiencing double-digit growth in payment volumes and revenues for most of the last decade. One may even argue that the alternative digital currencies such as bitcoin (GBTC) and light coin may be beneficiaries in certain niche use cases where there are very specific economic problems to be solved such as cross-border transfers and ensuring a store of value in very high inflation economies.
However, other relevant players that are also benefiting from the trend to digital payments are the providers of mobile point-of-sale infrastructure. One significant beneficiary here is Square (SQ) and Intuit who provides mobile point of sale terminals infrastructure. With customers increasingly wanting to pay using digital currency, small and mid-size businesses have no choice but to accept alternatives to cash and check if they want to close out a sale. Historically that’s not been possible for them as traditional payment processing infrastructure from the banks was too expensive. However, low cost payment terminals from Square have made the deployment of these terminals and acceptance of digital payments more economical. That’s not only been to the SMB's benefit but it’s also significantly benefited Square also.
The shift from physical commerce to e-commerce
The shift from physical, in store transactions to electronic-commerce has already had profound implications for retailers large and small. Most notably, it has impacted physical traffic to malls as consumers increasingly look to do their purchases online. One of the most obvious beneficiaries of this trend has been and will continue to be Amazon, who has almost 50% of the e-commerce market share in North America. With e-commerce effectively being a category where winner takes most, if not all, Amazon's dominance in this category can be expected to continue. However, there are other significant beneficiaries of this trend as well.
With e-commerce transactions unable to be physically settled, this continues to be an opportunity for the likes of PayPal (PYPL) who has been able to create a whole business around the settlement of e-commerce payments. Assisting consumers that have limited knowledge or interaction with unknown merchants to pay for goods and services from those merchants, and preserving their identity in the process will continue to be something that powers this business going forward.
Also, businesses that help enable the creation and execution of new e-commerce store fronts will also be major beneficiaries of this trend. Shopify (NYSE:SHOP) provides an e-commerce platform to small and mid-size businesses helping them conduct e-commerce on their own websites as well as on social networks. This is a business that has been growing fairly rapidly over the last few years and which looks set to continue.
The shift from linear TV to online content
Consumers have been ditching their cable TV subscriptions for some time now and generally making a move away from linear television to on-demand, online content. The most obvious beneficiaries of this trend have been the online advertising giants who seek to monetize time spent online with relevant advertising content.
While the shift in advertising dollars has been steadily moving in favor of online advertising, there still remains a gap between the amount of time spent online and the proportion of advertising dollars flowing there. The spoils here have been very disproportionately shared and largely concentrated in the hands of Alphabet (GOOG) and Facebook (FB). Google and Facebook control roughly 60% of total online advertising. The reason for this makes sense given that advertisers are looking to target a global cohort with as few media buys possible.
Google and Facebook are the only ones that allow these advertisers to do so at scale. There are a couple of additional dark horses in this race. While Amazon is still best known for its e-commerce capabilities, it is slowly and steadily building up a substantial advertising business of its own. Perversely the disintermediation of brands by e-commerce and a decline in traditional television audiences have diluted the effectiveness of television campaigns, causing the brands to want to get exposure to avenues like Amazon to advertise.
Another interesting player to watch in the growing trend of connected TV and audio advertising is The Trade Desk (TTD). The Trade Desk provides a real time bidding exchange which facilitates the efficient matching of ad inventory with advertiser demand. Unlike the walled gardens of Google and Facebook, The Trade Desk provides advertisers with real time visibility as far as where their ad dollars are being spent and at what price. The Trade Desk has also made a concerted effort to integrate its platform with connected TV inventory and take advantage of this rapidly growing medium. Furthermore, it has integrated into major Chinese suppliers of inventory such as Alibaba (BABA), Baidu (BIDU) and Tencent (OTCPK:TCEHY) to allow US advertisers to reach the Chinese market through its platform.
Another significant consequence of online, on demand content consumption is a need for easy discovery, curation and aggregation of online content to help consumers identify and select it. It’s here that the streaming platform owners which provide this aggregation have a significant role to play. While the likes of Apple (AAPL) and Comcast (CMCSA) are growing players in this space, the player that has pioneered this market way back in 2008 and currently has market dominance is Roku (ROKU).
Following businesses that are riding secular tailwinds in their industry can be a pathway to significant wealth for an investor. The advantage of identifying and investing in these businesses tends to be that the pathway to revenue and rapid growth is a little more straightforward. However, an equally important part of this analysis is the extent to which these businesses can create and capture long-term value which isn’t given away to new competitors entering the market or to consumers by having to provide aggressive pricing and discounting to maintain share.
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Disclosure: I am/we are long ADBE, V, MA, CRM, TTD, GOOG, FB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.