My favorite investing thematics for the next decade
Updated: Nov 26, 2021
“If you're looking for a home run -- a great investment for five years or 10 years or more -- then the only way to beat this enormous fog that covers the future is to identify a long-term trend that will give a particular business some sort of edge”
- legendary investment manager Ralph Wanger
Spotting major shifts in the economy, technology or whole industries have brought about the best performing stocks in my portfolio. It is these mega trends that will create significant value over an extended period for the elite companies that are best positioned to ride the wave.
There are nine major trends I'm tracking to scout for multi-bagger investing ideas. It is these investing themes that I believe will produce market beating returns for the next ten years. The nine investing thematics I review in this article are the ones I'm most comfortable investing in, because of my personal bullishness on the space and my ability to understand the market dynamics so that I can identify individual companies that I believe are best positioned to win.
Picking the top one or two companies that compete in the transforming industry or which will benefit the most from the economic and/or technological shift is key. It is not easy. It is a tricky balance between not entering the thematic too late when all the major gains have been realized and not being too early where you pick the wrong company because it's unclear who will win. Before pouncing on the latest technology fad, I tend to be skeptical and make sure all the elements of an investment ready mega trend are present. You do not want to be too early to the party, left holding the loot bag with no loot.
To find the winners within a major technological shift I have honed my approach into a specific methodology for picking tech stocks that deliver wealthy returns.
If you enjoy imaging what the future will look like and profiting from it, this article is for you. And, oh, there will be lots of charts!
9. War on cash
9. War on cash
The opening salvo in the war on cash occurred in 1950 with the introduction of the very first charge card from the Diners Club. Soon, American Express, Discover, Visa and MasterCard emerged as viable alternatives to cash and a way for consumers to easily use credit for purchases. This started society's slow move away from tangible paper money and coins to plastic cards and ultimately to digital alternatives to cash.
The transition from paper to pixel has not been driven by credit cards alone. The emergence of e-commerce in the 1990s and crypto currencies such as Bitcoin have all helped. Most recently, the transition has recently been accelerated due to the COVID-19 pandemic as people are more aware of hygiene and how germs are spread. There are of course many more advantages to a cashless society, including convenience, greater financial inclusion, and safer commerce for consumers. All of this has contributed to a significant growth in the number of noncash transactions.
Each country in the world, whether emerging or mature, is on this journey from cash to digital - albeit at different stages.
There are lots of different types of plays for investors interested in capitalizing on this trend. Payment network processors like Visa and Mastercard still play an important role and are great tollbooth collector like businesses. They make money every time one of the many credit cards with their logo is swiped. Next generation electronic payment processors like Adyen and Stripe, who communicate with the Visa and Mastercard networks, add lots of value in this new unified commerce world in exchange for their own per transaction fees, are another option. Digital wallets like Paypal's Venmo and Square's cash app, are another way to play the war on cash thematic. Digital wallets store currency in a digital format, allowing users to easily make financial transactions. Digital wallets are expanding upwards in the value chain, moving beyond transactions, to include savings accounts, investing and lending. According to ARK Invest research, digital wallets are valued between $250 and $1,900 per user today but could scale to $20,000 per user, representing a $4.6 trillion opportunity in the US by 2025.
The pace at which this shift to digital wallets is happening is astonishing. Just look at how fast these emergent digital alternatives to cash have taken hold, per Ark Invests Big Ideas 2021 report.
And the growth is projected to accelerate, reaching an expected 230 million digital wallet users by 2025 (Source: Ark Invest, Big Ideas 2021).
These growth estimates are not a stretch, especially when you consider the widespread adoption in China today. According to Ark Invest, the volume of mobile payments in China has exploded more than 15-fold in just five years, from roughly $2 trillion in 2015 to an estimated $36 trillion, nearly three times the size of China’s GDP in 2020.
Square (NYSE: SQ): What started out as the company behind the cool little white card reader that entrepreneurs, taxi drivers, farmers market merchants and all sorts of other small businesses could plug into their iPhone to accept noncash payments, has become a fintech powerhouse. The company was co-founded and is run by Twitter CEO Jack Dorsey. Yes, much maligned for splitting his time across two public companies, Jack Dorsey has led Square's meteoric rise. Square's product portfolio spans both merchant and consumer, including PoS hardware, SaaS offerings to run a small business, and their incredibly popular Cash App. One of the main reasons for my investment in Square, the Cash App, has expanded beyond P2P payments to include investing, buying and selling crypto-currencies, savings account, debit card and loan products. The future is bright as Square is in a good position to bring together the ecosystems of their small business with their consumer business. An expensive stock that is worth keeping on your watchlist for any pullbacks that provide a good entry point.
Adyen (OTC: ADYEY): A Dutch based payment processing company, Adyen has a who's who of marque customers. Uber, Facebook, Netflix, eBay, Etsy, Spotify, Nike, McDonald's, Microsoft, Booking.com, Levi's, and Farfetch, are just some of the companies that depend on Adyen for payment processing. Adyen offers a very compelling value proposition for retailers that are omni-channel on a global scale. It radically simplifies what would otherwise be a spaghetti mix of intermediaries to process payments with a single platform. Adyen takes care of the payment gateway, risk management and payment processing, allowing its merchant customers to serve consumers in over 150 countries and accept over 200 payment methods. Adyen enables unified commerce across physical and online commerce providing a unique and consolidated view of customer data and analytics. Their platform helps merchants reduce fraud and increase authorization rates for greater revenue. A recent buy for me (in the mid $40s), I am quite bullish on Adyen.
8. Digital transformation
The digital transformation gold rush is just getting started. IDC has forecast that global spending on digital transformation (DX) will reach a staggering $6.8 trillion globally by 2023. Furthermore, due to the impact of Covid-19, International Data Corporation (IDC) forecast that 65% of the world’s GDP would be digitized by 2022. Direct investment in digital transformation will grow at a healthy compound annual growth rate (CAGR) of 15.5% globally between 2020 and 2023.
This data from IDC could now be under stated. The work from home and learn from home model, thrust upon us by the COVID-19 pandemic, has accelerated digital transformation. The impact of COVID-19 on digital transformation is best summarized by Microsoft CEO Satya Nadella:
The pandemic has “fundamentally accelerated” the process of digital transformation across industries, and companies equipped with digital technology are going to be more resilient and be able to adapt faster to any tail event. What we were going to think about during 2030 is probably going to be true in 2025 - Satya Nadella, CEO, Microsoft
From a Twilio survey, 97% of executives said the pandemic sped up their digital transformation.
Organizations are moving quickly. Just look how quickly the % of customer interactions that went digital post-pandemic.
Look at how the digital transformation of these industry giants got pulled forward over the last few quarters:
Walmart eCommerce sales grew 98 percent in Q2-2021
Home Depot's Q3 2020 sales leveraging digital platforms increased approximately 80% versus the third quarter last year
Nike's Q2 2021 digital sales grew 84% YoY
We've seen the impact of digital transformation on a company's stock price play out before. The top two performing stocks of the 2010s, Netflix (don't forget Netflix started out as a mail order business) and Domino’s, are often the two most cited case studies of companies that have undergone successful digital transformations.
While both Netflix and Domino’s digital transformation driven massive stock run up over the last decade may have slowed, there are other companies out there that are either early in their transformation, or still have a lot of digital value ahead of them to capture for their shareholders. Below are four companies I think have some digital transformation upside.
Nike (NYSE: NKE): In October 2019, Nike named John Donahoe their new CEO. This was not your average CEO successor announcement. Mr. Donahoe, who has been on the Nike board of directors for five years, has a successful track record leading several tech companies. Most recently it was as CEO of the high growth enterprise cloud provider ServiceNow and prior to that as CEO of eBay. Nike has been on a tear with their digital strategy and execution. Nike is hitting on all cylinders in terms of improving the customer experience thru digital. They are also driving margin improvements from the investments they have made to digitize operations. Where I see more upside for investors is using digital to create new value propositions for customers altogether, specifically around using data to drive personalization. Three areas where I think personalization could unlock new growth for Nike include an emergent subscription service, and future potential opportunities in digital personal training and customized shoes. I'll sit on the sidelines at current prices though.
Home Depot (NYSE: HD): Home Depot’s accelerated growth over the last nine months has been turbo charged by COVID 19. A broader economic downturn and consumer spending shift into other discretionary categories as COVID resolves itself, could hinder Home Depot’s growth in the next couple of years. There are tailwinds that should help mitigate these macro concerns. An aging housing stock and more permanent hybrid/remote work arrangements post pandemic should sustain home renovation and office space conversion projects. Even with the possibility of tepid top-line growth, earning growth for Home Depot looks very promising as a result of its generous shareholder cash return policies and its digital transformation initiative. Home Depot is nearly complete a three-year, $11 billion digital transformation program. The centerpiece of this program is The One Home Depot initiative, which is transforming the shopping experience into a seamless experience across in-store and online. They have also invested $1.2 billion to build direct fulfillment centers. Once fully implemented, 90% of the U.S. population will have access to 1-day delivery from Home Depot. They are coming up short in terms of maturing their digital relationship with customers beyond the basics of commerce transactions and the in-store experience. If Home Depot can execute on more advanced digital opportunities they have yet to tackle, I see a long runway ahead for investors to capture the increased shareholder value these opportunities are sure to create. I hold Home Depot and it's and believe it's an easy buy at current prices (as of Feb 16th, 2021).
Starbucks (Nasdaq: SBUX): Starbuck is an early pioneer of digital transformation. They have since managed to turn their transformation into a never ending and iterative process that has been embedded into the culture at Starbucks. Starbucks has been, and will continue, being an early adopter of all sorts of different disruptive technologies. While it may not deliver the 20%+ annualized average return for SBUX shareholders it has over the last 10 years, asking for market beating returns from SBUX seems realistic. Make no mistake, Starbuck is a software company that has mastered the art of deeply understanding and satisfying its customers, that just so happens to sell coffee.
Check out my May 2020 blog post Finding the next digital transformation investing homerun for a deep dive on Nike, Home Depot, and Starbucks.
Nautilus (NYSE: NLS): The maker of classic fitness brands, such as Bowflex, Nautilus, and Universal, are undergoing a major digital transformation. While Wall Street has them priced as a hardware manufacturer they are building an AI driver personalize digital fitness subscription service. With a new tech CEO at the helm, Nautilus is trying to turn itself into a mini-Peleton. If they are able to pull off the transformation, and become a digital subscription service, their is huge upside in this name. With great reward potential comes great risk, and Nautilus is no exception. Steer clear of this one if high risk investments keep you up at night.
7. Developer friendly cloud platforms
There aren't enough software developers in the world that can power the digital transformation being demanded by customers. So, where can today's developers, who are helping companies, governments, and education institutions transition to digital, go to accelerate these transformations? A new breed of cloud platforms that are geared to make the lives of developers much easier.
Just like Ford doesn't build all of the components that go into their cars, developers don't need to build all of the infrastructure that goes into their apps. Platform providers like Twilio for communications, or Microsoft Azure and Amazon Web Services (AWS) for compute, storage and artificial intelligence (AI), have become the supply chain for developers building apps.
This trend of cloud platform companies decomposing the software stack into a set of APIs (Application Programming Interface) and selling them as a service so developers can focus on what customers really want is creating a lot of investor opportunity.
One of the more notable examples of these types of cloud platform services is Twilio, a communication as a service provider. Rather than build a custom video call experience as part of their app, developers plug in Twilio's API and (ta-dah) have a best in class video experience simply by copying and pasting a few lines of code. Co-founder and CEO of Twilio Jeff Lawson describes it as follows:
“We have taken the entire messy and complex world of telephony and reduced it to five API calls.”
With APIs such as those made available by companies like Twilio, developers can stich together all of these best in class building blocks from cloud service providers and build their apps much faster, more scalable and more globally than if they had to build from scratch.
The extent to which these 3rd party API building blocks are used by developers is more than you would imagine. Take Uber as an example. Much of Uber was assembled using 3rd party APIs. The Google map API, Twilio's messaging API for in-app communication between driver and passenger, Elastic search for matching drivers with passengers, are some examples.
This supply chain of digital building blocks is the fuel behind the pace of digital transformation we are now experiencing. It has all culminated in amazing investor returns for those individuals with the foresight to buy in early:
Twilio (NYSE: TWLO) investors that bought into its IPO have seen returns of 1,400%+ over a five year period
DocuSign (NASDAQ: DOCU) provides an API for developers to quickly integrate DocuSign e-signature functionality into their apps and web sites. Investors that bought at the IPO price of $38 have realized 550%+ gains in less than three years.
Okta (NASDAQ: OKTA) offers developers platform services to easily bring identity management into their apps. Investors lucky enough to invest in Okta's IPO have seen their investment grow 11 times in less than 4 years.
Fastly (NYSE: FSLY) - Why Fastly Could Be a Multi Bagger Over the Next Few Years
Today, many leading companies whose digital businesses depend on meeting their customers expectations of speed and an amazing experience use Fastly. Shopify, Spotify, Yelp, Pinterest, Slack, Twitter, and more are all building on Fastly to deliver user experiences that are driving their growth. Fastly provides developers with a secure and programmable edge cloud platform.
PagerDuty (NYSE: PD) - Can PagerDuty cross the chasm from niche to mainstream for outsized investor returns
PagerDuty offers customers a digital operations platform to reduce downtime and outages, leading to more revenue and more productive teams. The PagerDuty story is one of accelerating digital transformation that offers big potential investor gains if the company can cross the chasm from its current niche market into a more mainstream digital operations market.
ServiceNow (NYSE: NOW) - ServiceNow is growing into credible PaaS provider under Wall Street's nose
ServiceNow is helping organizations apply digital transformation to themselves with their workflow platform, streamlining previously manual and inefficient processes. Where I see some potential upside is their transformation from a Software-as-a-Service (SaaS) business into the powerful combination of SaaS plus Platform-as-a-Service (PaaS). While they are large cap company, the emerging PaaS business offers some intriguing upside for investors.
6. Data is the new oil
The amount of data being generated in our society today is mind bending.
In 2010, Google CEO (at the time) Eric Schmidt famously put this in perspective:
Every two days now we create as much information as we did from the dawn of civilization up until 2003
That was in 2010!
How far have we come in the last 10 years? In the last two years alone, astonishingly 90% of the world’s data has been created (Source: IORG). And, the exponential growth of data is only expected to get steeper as more people come online, social tools get further adopted, more things get connected to the Internet, more of the human genome gets sequenced, and more cat videos get uploaded to YouTube. IDC forecasts that there will be a 10 fold increase in the amount of data on the planet by 2025.
Data is now considered to be one of the most valuable assets on the planet. This shouldn't come as a surprise as you think about the millions of use cases in which data is being used strategically by organizations today. Data is sold to marketers so they can better target advertising and sell more products. Data generated from sensors is used by operators to track machine performance, do predictive maintenance and to optimize delivery routes. Data is used by human resources to better track employee performance and to recruit top talent. Data is being used by companies to develop their next generation of products and services. Banks use data to identify fraudulent transactions. Pharmaceutical companies are using data and analytics to aid in the discovery of new life saving drugs and to accelerate their time to market with these new drugs. Data is used by health care practitioners to dramatically improve health outcomes and to drive down the costs of care.
The number of use cases for mining data for insights and driving action is endless. And, proper use of data and analytics is very impactful. One example is how UPS uses data. UPS feeds data into its ORION platform to determine the most efficient routes for its drivers dynamically. In the United States alone, the company estimates that the system will reduce the number of miles its vehicles travel each year by 100 million, saving more than $300 million annually (Source: The Wall Street Journal, February 16, 2015).
The ability to harness data is a competitive differentiator that is driving growth for companies that are leading the way. In a McKinsey study they state:
Analytics capabilities have become a differentiating factor in industry competition, as leading players use data and analytics to grow revenue, to enter or even create new markets, to change the nature of their relationship with customers, and to increase organizational efficiencies. Organizations that are lagging behind will need to adapt quickly before the gap grows wider.
The business case for companies to invest in data analytics is very compelling. Research has found that investing in data and analytics capabilities has high returns. Organizations can use data analytics capabilities to achieve productivity gains of 6 to 8 percent, which translates into returns roughly doubling their investment within a decade. This is a higher rate of return than other recent technologies have yielded, surpassing even the computer investment cycle in the 1980s (Source: Jacques Bughin, “Ten lessons learned from big data analytics,” Journal of Applied Marketing Analytics).
Despite the significant opportunity with data and analytics, much is still going uncaptured. McKinsey in their 2016 Age of Analytics study found most companies are capturing only a fraction of the potential value from data and analytics.
If there is so much opportunity and proven success stories in the area of data analytics, why has value capture of it proven elusive?
Human capital is one of the biggest barriers standing in the way of realizing the full potential of data and analytics. There is a major shortage of the necessary data science talent that analyzes data with increasingly sophisticated techniques to derive insights. The demand for data scientists is exceeding the availability of people to fill this crucial role within organizations. In a McKinsey & Company survey, approximately half of executives across geographies and industries reported greater difficulty recruiting analytical talent than filling any other kind of role. Forty percent say retention is also an issue.
My watchlist includes some companies that are aiming to democratize data analytics so the limited supply of specialized data scientists is always required.
Snowflake (NYSE: SNOW): The most anticipated IPO of 2020, Snowflake has lived up to the billing. The stock has grown to a $80B market cap since its IPO, on revenue of only $264M in 2020. Snowflake is a data cloud, enabling data warehousing, data lakes, data engineering, data science, data application development, and data exchange. It is the only data warehouse built in-and-for the cloud, it solves the decades-old problem of data silos and data governance. Leveraging the elasticity and performance of the public cloud, the Snowflake platform enables customers to unify and query data to support a wide variety of use cases. I believe Snowflake is an amazing and innovative company, but with an astronomical Price/Sales ratio of 165 I believe it is too frothy. I will be keeping my eye on SNOW to take advantages of any dips.
Palantir (NYSE: PLTR): Palantir's software allows customers to aggregate massive operational data sets and then use AI algorithms to make optimal decisions. They have primarily served government customers, in high stake scenarios, including counter-terrorism intelligence mission, monitoring airplane fleets for preventative maintenance, and helping the CDC track and contain the Covid-19. They have more recently entered the commercial market with the release of their Foundry product, helping customers “answer computationally-challenging questions and empowering the discovery of data for cross-functional collaboration". I personally have a large position in Palantir and shared why with my readers a few months ago.
5. Social Commerce
Want to see the future of e-commerce? Just look to Asia.
Social commerce has exploded in Asia. For example, in China today many consumers today shop within the ubiquitous social messaging platform WeChat. Social commerce is the online convergence of shopping and community. It typically takes the form of commerce on social media platforms, or group experiences on e-commerce sites.
In 2019, the market size of the social commerce sector in China reached approximately $343B (accounting for 11.6% of the country's e-commerce marketing, nearly doubling from the previous year. And, it was projected to reach $571B in 2020 (Source: Statista, Dec 2020). By 2023, it is projected that 447B people in China will be social shoppers.
So, why are Chinese consumers, and now the rest of the globe, adopting this new way of shopping?
Social commerce is gaining mass adoption because of its ability to introduce people to relevant products they never knew existed, and because it helps people have more trust in what they are buying online, something that is at a deficit in traditional e-commerce. It can still sometimes feel like a leap of faith buying something on Amazon based solely on the 100s of product ratings from complete strangers. Can I trust that most of these reviews are coming from honest brokers? Alternatively, as part of the social shopping experience people feel much more confident buying something that is endorsed by their friends or trusted influencers.
So, how ready is North America for social commerce. While its still in the early stages, it's happening. In 2019, social commerce sales in the United States were estimated at 22 billion U.S. dollars. As social media's influence continues to increase, U.S. social commerce is projected to reach $84.2 billion U.S. dollars in 2024 and accounting for 7.8 percent of U.S. retail e-commerce sales.
Much of the purchase journey in Western countries is online and social today.
Social commerce is also an extremely frictionless buying experience, with higher conversion rates and fewer shopping cart abandonments, making it the preferred channel for merchants.
Some more data points from BigCommerce pointing to Western markets reaching a tipping point for accelerated social commerce adoption in the coming years:
60% of Instagram users say they find new products on Instagram (so it makes complete sense to also sell them on the platform).
30% of online shoppers say they would be likely to make a purchase from a social media network like Facebook, Pinterest, Instagram, Twitter or Snapchat.
23% of shoppers are influenced by social media recommendations (so why not sell straight from that recommendation).
51% of millennials (who will soon be the major buying market) are likely to make a purchase over social media.
84% of shoppers review at least one social media site before purchasing (so it makes sense to sell where they’re going to research).
With social commerce in the US and other Western markets still in a nascent form, I believe there is a big opportunity for investors to capitalize now. At $30B today, social commerce in the US represented only 3.7% of total ecommerce sales in the US ($794.5B) in 2020. Compare that with the 11.6% of total e-commerce sales in China flowing through social media platforms, you can see there is a lot of upside for US social commerce players.
Pinterest (NYSE: PINS): One of my favorite growth stocks, Pinterest is well positioned for the coming wave of social commerce. Of all the social networks, people use Pinterest the most (by a wide margin) to find/shop for products.
It's no surprise that Pinterest is the most popular social network for finding/shopping for products. People use Pinterest primarily as a visual discovery tool for finding ideas like recipes, home and style inspiration, and more. It's not a leap to go from product inspiration to product purchase. And, Pinterest makes it really easy for its users to purchase what inspires them. Buyable Pins allows users to click directly on pinned items and add them to their shopping bags, so they can complete the purchase on Pinterest rather than having to click through to the merchant’s website.
Facebook (Nasdaq: FB): Facebook needs no introduction. They are turning their Instagram app, the highly visual and aspirational social network, into a social commerce platform. With Instagram Shop users can discover shoppable products and buy directly from within the app. Instagram can leverage its large network of influencers to trigger the sales funnel. With its significant user base and extensive data, Facebook will be a big player in social commerce.
Sea Limited (NYSE: SE): Sea Limited is a Southeast Asian, Singapore based e-commerce, gaming and payments company. For those familiar, they are kind of like the Mercado-Libre (e-commerce giant in Latin America) for all of Southeast Asia with a unique gaming twist. They actually got their start in gaming with their Garena platform an have since grown into e-commerce and payments. In 4+ years they've grown their e-commerce business, called Shopee, into a $1 billion business - surpassing Alibaba-backed Lazada in the region. They are growing both their e-commerce and payments business in the triple digit territory. Sea Limited uses social commerce to drive engagement and sales on their Shopee platform, including Shopee Farm (where friends are invited to water your crops) and livestreaming. The stock seems expensive but not grossly given its optionality. The stock has grown more than 1,000% since the beginning of 2018.
Tencent (OTC: TCEHY): Tencent is one of the most diversified businesses in the world, let alone China. They run massive businesses in social media, financial services, gaming, music, movies, sports media and enterprise cloud computing and collaboration software. The not only run these successful businesses but they are often referred to as the technology version of Berkshire Hathaway because of their investments in some of the biggest and up and coming names in technology. Just to name a few - Epic (40% ownership stake), Activision, Ubisoft and Riot (100% stake) in gaming, Spotify, JD.com (17% stake), Sea Limited (25% stake), Snap (12% stake), and Tesla.
Tencent is also becoming a major player in the most robust social commerce market in the world, China. Their strategy centers on being an enabler for e-commerce players, offering tools and solutions to facilitate e-commerce on their hugely popular WeChat platform. It's main social commerce program Mini Shops launched in 2017. Merchants can easily create lightweight online stores in a few minutes, enabling WeChat's over 1.2 billion user base to make purchases within WeChat, make payments and share any recommendations with their friends. In its 2019 annual report, Tencent reported the total transaction value on Mini Shops exceeded US$ 115 billion, a 160% YoY increase.
I recently sold my Tencent position due to my growing concern with Chinese companies in general.
4. Streaming Video
There is a reckoning coming in the television advertising industry that presents a great opportunity for investors. Advertisers have been slow to shift their advertising budgets to follow where television viewers are going. Despite an accelerating decline in traditional television viewers and hours watched, advertisers have remained surprisingly loyal to this declining medium.
We all know now that people are cutting their cable cords in favor of video streaming or Over-the-Top (OTT), which is the delivery of film and TV content via the internet, without requiring users to subscribe to a traditional cable or satellite pay-TV service like Comcast.
There is a massive generational shift in viewing habits. Because of the rise of streaming video services like Netflix, Disney+, and YouTube, almost half of adults aged 22 to 45 consume no content via traditional TV. Park Associates reported from their research (as of January 2021) that 43% of US broadband households with traditional pay TV are likely to switch to a virtual multichannel video programming distributor (vMVPD) in the next 12 months.
As TV viewing dwindles, we are finally starting to see revenue shift from linear TV to Streaming video (SVOD), inclusive of advertising and subscriptions.
There are several drivers that should accelerate this shift to streaming video:
Advertising will increasingly factor viewership into their advertising decisions, growing SVOD advertising revenue
Content investments are being made in SVOD leaving little reason to tune into linear TV
SVOD viewership is exploding, accelerated recently due to the COVID 19 pandemic. For example, YouTube viewership has scaled more than 10X since 2012 to more than a billion hours per day.
Digital video ads are much more effective than their analog counterparts. SVOD ads can target customers, measure ROI, and drive conversion in ways impossible for conventional TV ads.
The opportunity in SVOD is to capture the accelerating shift of advertiser budgets to streaming and subscriber growth.
Roku (Nasdaq: ROKU): Roku is often mistaken as a hardware company that makes streaming players, helping millions of people to watch streaming services such as Netflix, Hulu and Disney+ on their TV. Many investors have missed the fact that Roku is a platform company that owns the dominant Operating System for streaming entertainment - not just for their hardware but across 12 TV manufacturers currently. Why does this matter? With the explosive growth of SVOD and ramp-up of linear TV advertising revenue shifting to streaming, no company is better positioned to capture this massive market opportunity. For Roku they are capturing this in several ways, including advertising revenue share across the apps on their platform, share of new pay subscriptions (excluding Netflix, but including Hulu, Sling and Disney+) and its fast growing free Roku Channel. I personally believe Roku has the potential to exceed the size and dominance of Netflix. The stock is not cheap so if you are interested in owning consider dollar cost averaging in.
The Trade Desk (Nasdaq: TTD): The Trade Desk offers advertisers an automated platform to buy ad spots in a programmatic way. Rather than marketers having to make individual deals with the multiple web sites, podcasts or streaming video providers they want to advertise on, they can just deal with the Trade Desk. The Trade Desk offers all sorts of tools to make the advertising process more efficient, targeted, impactful and measurable. The move to streaming and connected TV is a massive tailwind for the Trade Desk. In its latest quarter, connected TV advertising spending on its platform doubled, while global ad industry spending fell 4.5%. The Trade Desk is an amazing company and it has a great CEO. Like Roku, TTD is an expensive stock. I personally believe Roku has more growth runway so would only consider buying more TTD on big dips.
Curiosity Stream (Nasdaq: CURI): Started by the founder of the Discovery Channel, Curiousity Stream is trying to become the Netflix of factual entertainment. They offer factual based programs and documentaries in science, technology, history, society, nature, lifestyle and for kids. Curiosity Stream offers investors several revenue stream, including direct to consumer subscriptions, royalties from companies that are creating streaming bundles, and selling their content to academic institutions and corporations. Curiosity Stream only recently went public so their limited track record brings a fair bit of risk.
3. The future of gaming
The video game industry has come a long way since Pong, a table tennis themed game that became the first commercially successful arcade game. The arcade led to people wanting to play games at home. Enter the console. PCs led to more sophisticated and powerful games. Handhelds like Nintendo's Game Boy brought mobility to the gaming market. And, smart phone proliferation took mobility to a new level, creating a whole new category of casual gamers who were looking to kill idle time. Oh, and the Internet? Well, without the Internet we wouldn't have multi-player games with people around the world playing against one another and cloud scale gaming services that enable continuous play from anywhere and on any device.
Today, gaming is a $180B market (IDC 2020), larger than the global movie and North American sports industries combined. Gaming is becoming a dominant entertainment option for billions of people around the world.
It's not just hard core gamers that are driving the industry. There are more than 2 billion people worldwide who play some form of video games today. It is projected that this will grow to 3 billion gamers by 2023 (Source: Business Casual). For comparison, Netflix has 200 million subscribers today. People are playing video games both earlier and later in life, and the gender mix is nearing par. VanEck estimates 65% of adults play video games today.
Where is all of this going?
There are major changes occurring in the gaming industry that go well beyond the shift to "all you can play" style subscription services being launched by Google, Apple and Amazon.
First, the monetization models are changing, shifting from paying to play to paying for "things" within the game.
Believe it or not, average people are buying virtual goods or services within the games they play online with friends and strangers. An independent survey commissioned by blockchain infrastructure firm Forte showed that 24% of gamers have purchased virtual goods while playing games, spending an average of $168 over the last year. Virtual goods include avatars, game power-ups, and accessories for your avatar such as vintage glasses or gear like hoverboards. A really creative example is the Singapore based food delivery app Deliveroo sending avatars into Nintendo's virtual world mega-hit Animal Crossing offering players the much coveted soft-serve-ice-cream-shaped lamps and discount codes for deliveries. In the popular gaming platform Roblox, creators earned $100 million in revenue in 2019 by selling virtual goods and other in-game upgrades. The global virtual goods market value is projected to reach $190 billion by 2025 (Source: Adroit Market Research).
The second biggest innovation poised to catalyze the growth of the gaming market is the mainstreaming of Augment Reality (AR) and Virtual Reality (VR). ARK Invest forecasts that by 2025 the global AR and VR market will grow at a 59% CAGR to $28 billion by 2025. These technologies will take gaming to a whole new level of immersion that will bring in new users and extend the time we spend in these virtual world's. ARK forecasts the average time spent playing video games will increase from 1.1 hours per person per day to 1.5 hour during the next five years.
Many, including myself, believe this will all culminate in the rise of the metaverse. The concept of a Metaverse was first introduced by sci-fi author Neal Stevenson in his book Snow Crash. Matthew Ball, venture capitalist, describes the Metaverse as an always-on, real-time world where people from around the world can interact with one another. It will have its own economy, and connect the physical and digital. You can think of it as a "third-place" away from home and work. If we are being fair, too many people already have lost their spouse to this third place in its current form of video games. The Metaverse will be a melding of several different virtual worlds, many of which exist today (e.g., Fortnite, Roblox, Minecraft, Animal Crossing), that become interoperable where your data, digital wallet and virtual goods will follow you in and out of these virtual worlds across the metaverse. Many people and companies will be involved in building the Metaverse. You can attend concerts today in virtual worlds like Fortnite and Roblox today, and in the future I can imagine attending conferences in the metaverse, taking a fitness class, and probably going to synagogue in the metaverse. Ok, maybe not synagogue, but not because it won't be an option in the metaverse. Your favorite brands today, along with new digital first ones, will be there as well.
All this potential, and we didn't even talk about e-sports or mobile, makes me think the projections of the gaming market reaching $300 - $390 billion (depending on which analyst you talk too) by 2025 are conservative.
Nintendo (OTC: NTDOY): The 130+ year old Japanese home entertainment company is undergoing a long overdue transformation. They are becoming less dependent on each new console release and improving their ability to monetize a growing install base. Nintendo has an unmatched track record in game development, releasing 21 of the 25 best-selling console and handheld games of all time. I am quite bullish on this undervalued gaming industry icon and they were a recent recommendation of mine.
Unity (NYSE:U): Unity is one of the world’s leading platform for creating and operating interactive, real-time 3D content. Unity's original and most important product is a platform for game developers to create, run and monetize games across mobile, PCs, consoles and AR/VR devices. They power 50% of all games. They are now expanding into new industries to enable all sorts of creators, including architects, engineers, automotive designers, filmmakers and others, to bring their creations to life. Lots of optionality with this business. What probably offers the greatest upside is providing tools for all creators working in the nascent (but fast growing) AR/VR paradigm. While I'm bullish on the business, I only have a starter position due to its current valuation. I will continue to monitor the stock to see if a good entry point comes along.
The other two gaming companies I'm bullish on are not public yet. Both Roblox and Epic Games have their own virtual worlds today and seem likely to key players in building the metaverse. Roblox will be going public in 2021, with Epic Games likely to follow, so I will watch for good entry points post IPO.
2. Artificial intelligence
Perhaps the thematic, of all discussed here, that will have the greatest economic impact on the world is Artificial Intelligence (AI). The McKinsey Global Institute in 2018 forecasted that AI would deliver $13 trillion of incremental economic activity by 2030. Very few technologies throughout history have had this level of societal and economic impact. We're talking the Internet, electricity, steam engine and printing press level impact. McKinsey's forecasts call for an additional 1.2 percent of additional GDP growth per year through to 2030. As a comparison, the steam engine's boost to productivity of 0.3 percent per year between 1850 and 1910, and IT in the 2000s delivered 0.6 percent.
This is quite believable when you think about the applications AI technologies, such as computer vision, natural language, virtual assistants, robotic process automation, and machine learning, will have across industries. Though not exhaustive, the opportunities can fall into four main buckets: augmenting how processes or tasks get done today, automating manual labor, extending or innovating products and services, or increasing the competitiveness of a company (or country for that matter) due to better AI and/or data. Think about how medical practitioners can improve health outcomes with the assistance of AI pointing out possible root causes of symptoms that no human brain could comprehend fully. Or, using smart robots to automate whole manufacturing processes and eliminate all manual labor (these benefits bring lots of negative externalities that must be managed). New or enhanced products/services are emerging all the time as a result of the application of AI, such as predictive models being used in loan processing.
These AI use cases are being adopted across organizations, with lots of growth runway and new applications.
I see two main types of investing opportunities within the vastness of the AI space:
Disruption of industries: There are certain industries that are, and will be in the future, completely disrupted by new or innovative incumbents that apply AI in transformative ways. Certain industries have more AI upside than others, as indicated by McKinsey's analysis below:
Keep in mind that for true industry disruption, the AI application must go beyond what is already pretty widely adopted and establish a moat by the company that is doing the disrupting. Automating non-core administrative processes isn't going to move the dial. Lemonade (NYSE:LMND) is upending the entire insurance industry by using AI algorithms to more precisely quantify risk when underwriting insurance policies, leading to substantial profitability gains that allow them to easily undercut traditional insurance companies. And, as Lemonade collects more data to feed its algorithms, the traditional insurance providers are left in the dust. Data widens its moat, making their competitive advantage more sustainable.
2. AI tools for developers: Building AI models and applications is not easy and it takes a lot of time. The platform companies that provide developers the ability to more easily and more quickly build and operate AI applications offer investors compelling opportunities. Big cloud companies today such as Amazon Web Services and Google Cloud offer AI tools and services for any developer to utilize in their applications.
LivePerson (Nasdaq: LPSN): Chances are if you engaged with customer service in the last year you probably interacted with artificial intelligence (AI). LivePerson is one of the biggest players in conversational AI . LivePerson is trying to recreate the sort of conversations you would have with a retailer in a physical store, or at a bank branch, but with a "compassionate" AI bot for the digital world.
Upstart Holdings (Nasdaq: UPST): Upstart is an AI-powered lending and underwriting platform created by former Google employees. Upstart offers banks a very attractive white label AI lending platform they can use to improve their loan businesses. Upstart uses 1,600+ data points and 15 billion cells of data in it's AI model to accurately identify and measure credit risk. This has meant a 27% increase in borrower approvals (as compared to traditional model), while delivering a 75% reduction in loan loss rates. Upstart Holdings is very new to the public market, IPOing in December 2020. With their limited public track record and recent stock price run-up, I remain on the sidelines but will monitor Upstart Holdings over the next few quarters.
1. The genomic revolution
It's been more than a decade since the first human genome was mapped, which was a multi-country, massive collaborative project to map the genetic make up of human beings. The is important because genomics can determine at an early age what diseases a person might contract later in life and help treat them more effectively.
At the time it cost $5 billion (adjusted for inflation) to map the first set of genes (a process that's called human genome sequencing) and it took 13 years. Since then, costs have plunged and major efficiencies have been achieved. It now costs under $1,000 to sequence someone's genes and it is projected to drop to $100-$200 by 2022. As the price continues to drop, DNA sequencing will become more mainstream.
Deflation is making gene sequencing affordable so that it can be part of everyone's physical. Doctors will use it identify mutated genes that lead to disease, take early action to prevent the disease and improve health outcomes. More excitingly, with a new group of gene editing technologies called CRISP, scientists will be able to learn how to cure diseases. This is why it's called the genomic revolution and it will completely transform how healthcare is practiced.
Cathie Wood of Ark Invest outlines how genomics will be used:
The convergence of DNA sequencing, artificial intelligence and gene therapies (CRISPR gene editing technologies) are going to cure disease - Cathie Wood
This convergence of technology and science surfaces the mutations in our genomic profile, highlighting early manifestations of disease, and with the combination of AI and gene editing cures disease. Genomics is being used today for certain genetic diseases such as vision disorders and sickle cell anemia. The potential includes the most deadliest genetic diseases on earth, such as cancer. In fact, genetics play a role in nine of the 10 leading causes of death in the US, excluding car crashes and other accidents.
Cathie Wood chose the genomic revolution sector as the most under-appreciated opportunity by Wall Street. In a 2019 interview:
We are unlocking the secrets to life and death and that science and knowledge is going to enter into healthcare decision making for the first time... More than half of the spending on healthcare is wasted... The reason [genomic revolution] is so inefficiently priced is [that] the traditional healthcare analysts... have not been in labs recently and experimenting with gene editing and watching gene editing correct mutations or change the dynamics of how a plant is going to grow... [The genomic revolution] seems too "sciency" and too complicated, that's where you know you have some real opportunity...
- Cathie Wood, Big Ideas Summit 2019
ARK Invest estimates that by 2024 therapeutic pipelines and tool providers should generate hundreds of billions of dollars in new revenue and trillions in new market capitalizations as they transition to the genomic age.
Who will the winners be? I have no idea, but I know who does. Cathie Woods and her team have been running the ARK Genomic Revolution ETF (ARKG) since 2014. This fund invests in companies at the forefront of genetic editing. It's performance has been simply amazing.
This is a fund I am quite happy to own, letting the experts actively manage my money while allowing me to participate in what promises to be one of the best investor opportunities for the next decade.
The stocks mentioned in this article are just ideas, not recommendations. Before making investment decisions please do your own research and/or seek the advice of a professional adviser. All of the information contained in this about the companies mentioned is public. The author of this article owns Square, Adyen, Starbucks, Home Depot, Nautilus, Fastly, ServiceNow, Alteryx, Palantir, Facebook, Pinterest, Tencent, SeaLimited, Roku, The Trade Desk, Curiousity Stream, Nintendo, Unity, and ARK Genomic Revolution ETF.