The impact of digital transformation on investing
Is it too late to invest in the digital era?
Marc Andreessen, founder of Netscape and successful tech venture capitalist, wrote one of the more accurate forecasts of the future with his article published in the Summer of 2011 called Why Software is Eating the World. He made the case for a once in a lifetime digital transformation that is underway and changing our economy:
“My own theory is that we are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.
More and more major businesses and industries are being run on software and delivered as online services—from movies to agriculture to national defense. Many of the winners are Silicon Valley-style entrepreneurial technology companies that are invading and overturning established industry structures. Over the next 10 years, I expect many more industries to be disrupted by software, with new world-beating Silicon Valley companies doing the disruption in more cases than not.” - Marc Andreessen
He might have been a little exclusionary with his focus on one geography, ignoring the significant innovation happening just north of Silicon Valley (hello Microsoft and Amazon in Seattle) and the far east (Alibaba, Tencent, and Baidu of China), but his prediction has been very accurate. Every industry, from retail to financial services to mining to manufacturing is being massively transformed by advancements in technology. Whether its cloud computing, artificial intelligence, big data, the Internet of Things, and smartphones, technology innovations over the last decade have fundamentally changed the way our economy works.
What does this all mean for investing?
To get a sense, you just have to look at who the five largest companies, by market cap, were at the beginning of the decade as compared to now. In January 2010 the top five companies were PetroChina, Exxon Mobil, Microsoft, ICBC, and Walmart. As of the close of the decade the top five companies were Saudi Aramco, Microsoft, Apple, Amazon, and Alphabet. Going from one tech company among the world’s five largest companies to four out of the top five, in a decade, is pretty telling.
The S&P 500 information technology index, comprising 70 stocks, is up 360% over the past decade, almost double the 196% gain for the S&P 500 Index (Source: Nasdaq).
Now, let’s have some perspective. History does not repeat itself, but as Mark Twain put it – “it often rhymes”. I believe we are going to continue to see technology innovation create massive value for investors over the next decade.
What are the wise investments to make over the next decade as these technologies continue to get adopted and new ones, such as 5G, blockchain, 3D printing, robotics and quantum computing, become more mainstream?
Here is where I will veer away a little from the much smarter and more successful tech investor Marc Andreesen, at least with what he believed ten years ago. I believe the “software companies that are poised to take over large swathes of the economy” will not be restricted to “Silicon Valley” type companies. Of course we will continue to see new tech unicorns emerge that transform whole industries and take the stock market by storm. But, even the more traditional companies that are reshaping themselves and how they compete in the market through technology will succeed. Companies like Walmart, Domino’s Pizza, and Disney are all successfully transforming to compete in this new digital era. Starbucks and Nike have gone even further, appointing former technology executives as their new CEOs. You’ve probably heard the expression, “all companies are now software companies”. The companies that recognize this reality will thrive, regardless of whether they are from Silicon Valley or not.
To help you on the journey of realizing this massive value creation in the stock market that I believe will be driven by technology innovation, check out these recent blog posts