The world is rapidly changing: Enabling technologies are becoming less expensive and more powerful, innovative business models are capturing growing markets by offering value-added products and services, and in turn, societal norms are evolving in response.
But what does it mean for investors and how does it affect our investment mindset?
We wanted to know, so during the summer of 2020, our team undertook an ambitious and extensive effort to forecast important drivers of end-market, industry, and corporate profit growth-essentially, to create a growth investor’s roadmap for the next decade.
As active investors, we have always believed that taking a step back from our day-to-day activities and thinking more broadly about the future is essential.
But the year 2020 provided even more inspiration. It signified the beginning of a new decade, which is always a good time for forecasts. COVID-19 further inspired introspection as we asked ourselves how the world would change as we exit the pandemic. Taking a break from the daily news provided some relief and also allowed us to have some fun.
Predicting the Future – Essential to Active Investing
As active growth investors, we seek to analyze the future to predict outcomes in a way other investment approaches cannot.
We are ultimately betting against the very powerful reality of mean reversion. The adage that “the more things change, the more they may stay the same” is powerful, and is often true.
But in reality things do change. Consumer behaviors evolve. Humans innovate and create new solutions. Corporate profit pools shift. And new winners emerge. Just think about some of the things the world was predicting at the turn of the last decade.
In 2010, Gartner predicted that by 2014, not even halfway through the decade, global mobile phone penetration would be 90%; today it is only around 72%.
Meanwhile, in 2011, International Data Corporation (IDC) predicted mobile gaming industry revenue would reach $9 billion in 2015; it actually reached $34 billion, and is now $77 billion.
And back in 2010, who really understood the businesses models the internet would enable? The first Uber (NYSE:UBER) ride was taken in San Francisco in July 2010; today, Uber has a market cap of $59 billion. And remember when we thought Napster would destroy the music industry by eliminating artists’ incentives? The adoption of subscription business models drove a different outcome, and Spotify (NYSE:SPOT) now has 286 million subscribers and revenue of greater than $7 billion.
The point is, as Niels Bohr, father of the atomic model, said, “Prediction is very difficult, especially if it’s about the future.”
For now, the ability to predict changes is still the domain of humans. It is our job, then, to develop a practice of forecasting, which involves observing, learning, and anticipating the future.
With that in mind, here are five themes we expect will gain the attention of investors in the decade to come.
Theme 1: Gene Editing
McKinsey refers to a trend it calls “synthetic biology,” which is essentially the merging of science and big data. This can be seen across diverse fields, such as medicine, biofuels, agriculture, food/nutrition, and even cosmetics.
In medicine, we seem to be at a tipping point, driven by genome sequencing and modularizing pieces of DNA. Research and development (R&D) funding has increased significantly since 2015, and we believe commercial breakthroughs are imminent.
The environmental, social, and governance (ESG) implications are massive, both good (think about renewable resources) and bad (think about the ethics of playing God).
Theme 2: Conservation Capitalism – Doing More with Less
Buildings consume 40% of all global energy, but every year energy regulations get a bit stricter (around 2% stricter, by some estimates). This forces continuous innovation.
Technology gains within industrial applications are delivering improvements in areas such as construction materials, HVAC systems, elevators, and security systems. New business models are also helping drive these changes via testing, inspection, and certification-compliance as a service, for example.
And smart buildings are only the beginning. Efficiency gains have also been made via smart grids and smart cities (everything is getting smart these days).
Combined with other trends – a growing middle class, urbanization, and climate change – this is a long-term, stable growth trend ripe with disruption potential.
Once again, the ESG implications are significant, as ESG awareness could lead to a more accurate pricing of negative externalities, creating bigger total addressable markets (TAMs) for solution providers.
Theme 3: Factory as a Service – The Future of Manufacturing
There are massive benefits to a fully digitalized factory, which includes robots, cobots (collaborative robots designed for direct human-robot interaction), and full connectivity via a localized internet of things (IoT).
Consider the implications for real-time asset monitoring, accuracy and precision, and inventory management, for example. And from a customer point of view, a fully digitalized factory creates a new way of personalizing products.
We see factory automation as major growth area, with vision, sensors and measurement, and industrial software, in particular, accelerating (partly due to COVID-19). We also expect a shift to “as-a-service” business models across industries.
Theme 4: From Snowcrash to Fortnite and Beyond – Exploring the Metaverse
Applying gaming techniques more broadly – the gamification of everything – is just one illustration of the rapidly changing consumer experience landscape, due in large part to digitization at scale.
The key here is connections – between brand and consumer, between consumers and their networks. It’s the idea of nudges, badges, and tokens, which dates back a century, but it’s different now.
One Chinese company, for example, encourages interaction by lowering costs for users who share goods or services they like with their online networks.
Or, consider the Peloton (NASDAQ:PTON) phenomena. In the past, nothing beat the social aspect of group exercise. Today, you can spin in your basement, and the experience is even better thanks to data and connectivity. Peloton is gamifying fitness.
While today’s digital world might imply fewer personal connections (as parents of teens can attest), in reality, digital networks are even more powerful than ever – and they are changing relationships between brands, merchants, and consumers.
Theme 5: Connected Commerce
Here we think about the infrastructure on which digital services can thrive, such as payment ecosystems and digital currencies.
Digital business models often start as support infrastructure, at least in emerging markets. Alipay, for example, began as a third-party mobile and online payment platform, and now averages 731 million monthly users and had payment volume of $17 trillion in 2019 (compared to $8.7 trillion for Visa (NYSE:V) and $4.7 trillion for Mastercard (NYSE:MA)).
But companies in this space keep adding services, and thereby enter a virtuous feedback loop. Think about how digital payments are driving financial inclusion, for example.
Over the coming months our global research analysts will discuss these themes in detail – on our podcast and on this blog. For now, however, we wanted to provide a glimpse of what we will be discussing.
I’m not suggesting we always get predictions right; rather, if we have a discipline around predicting, we are more likely to get more right. The discipline of forecasting is necessary to create a framework for understanding the world and predicting the future in a highly systematic and iterative way. Only in this way can we decrease the variability around predicted outcomes, improve accuracy, and act on investment ideas earlier and with greater conviction.
And as active growth investors, we believe we have an advantage, as noted above – our ability to analyze the future to predict outcomes in a way the other investment approaches cannot.
Editor’s Note: The summary bullets for this article were added by Seeking Alpha editors.