Portfolio Managers Doug Rao and Jeremiah Buckley discuss how technological disruption should play into investors’ analysis of companies, what the next phase of tech disruption may look like, and the investment implications going forward.
- We have witnessed acceleration in technology-driven disruption over the past decade yet we still appear to be in the early stages of a long-term proliferation in technology that will impact companies, industries, and societies profoundly.
- There are winners and losers along the path of digital disruption, with many companies on the wrong side of this trend. Identifying which firms will benefit and which are vulnerable will be crucial for investors and may depend largely on how transferable their intellectual property (IP) is to a growing digital-led world.
- Disruption is widespread, occurring not only in the information technology sector but also in more traditional “old economy” industries, where companies are also using technology in innovative ways.
Disruption Is Creating Winners and Losers
As we’ve noted before, we are witnessing widespread technological disruption: the adoption of new technology across the global economy and simultaneous displacement of old technology. This development is either a threat or an opportunity, depending on which side of the digital divide a company finds itself. Disruption is creating a clear delineation between “have” and “have-not” companies. There are those that are adapting by leveraging their intellectual property (IP) and investing to transform their businesses and those who are encumbered with legacy assets. Many businesses, in our view, are on the wrong side of this trend and will either be left behind or face the prospect of higher, burdensome investment rates to catch up.
The Next Phase of Disruption
We believe that the next phase of disruption will begin with companies that have established a head start in the first wave. Large digital platform providers are using their scale and enormous collection of data assets to enable artificial intelligence (AI) and machine learning, which we believe will be among the foundational technologies fueling future growth. That said, official intervention could provide headwinds for these disruptors.
Paradoxically, we see part of the next phase as a democratization of technology. Advanced technologies are becoming accessible to firms of all sizes. This leveling of the playing field is one reason why we believe the tech revolution could play out for an extended period.
We believe firms that have invested in making direct, digital connections with their customers stand to benefit. To continue delivering organic growth, we think companies increasingly need to have a direct relationship with their customer and a powerful feedback loop, which technology has helped to provide. We also see opportunities in firms that have invested strategically in cloud services like infrastructure and Software as a Service (SaaS), which helps drive faster innovation cycles. These tools help make firms more agile and adaptable. They also allow companies to offload costly internal networks, share data more readily across their organizations, and deploy software more efficiently.
We see potential growth in unexpected areas as more traditional industries are leveraging technology in innovative ways. In the transportation industry, we have seen companies investing in sensors and using data analytics to understand where their assets are placed in networks, how they can be more efficient and offer better customer service. For example, a large equipment manufacturer has made the growth of precision agriculture a priority. They can now equip farm machinery with sensors and systems that collect and analyze data to more effectively prepare fields based on soil conditions, improve seed placement and spacing, apply fertilizer more efficiently, and improve harvests. Tech advances like these that bring value to farmers may lead to an upgrade cycle in the industry, driving growth.
The retail industry has been hit particularly hard with the consumer shift to online marketplaces, but we have seen some retailers begin to leverage technology to improve their competitive standing. Companies now have the ability to use AI to analyze data driven by customer online preferences. With this data, they are able to make better deals and offers to customers, potentially increasing sales.
We think that companies’ adaption to new technology can continue to drive growth, but for every company that embraces technologies in new ways, there are companies at risk if they fail to adapt.
Despite rapid growth, we still see opportunity, especially in our focus market of U.S. large-cap equities. Many of the world’s largest technology companies are based in the U.S., and it has been one of the great growth and innovation engines for the world. We foresee that continuing. Through the lens of innovation, we believe that there are still individual growth opportunities despite macroeconomic and geopolitical concerns.
Technological disruption has impacted every business we analyze. The sheer scale of potential technology use is enormous. While there are remarkable applications, technology is also being woven into the minutia of our everyday lives. As technology has disrupted companies throughout the economy, it has also informed how investors evaluate those companies. Investors must understand what businesses are doing to adapt to this vast technological change, because in our view, digital disruption is the single biggest factor impacting company fundamentals. Steve Schwarzman, the founder and long-term CEO of Blackstone, the largest private equity firm in the world, recently echoed this view:
Tech is the most profound force in investing today because it is so disruptive that there are few companies that are not tech companies that will be able to withstand the changes that technology brings in terms of preserving their business models. So whenever today you look at the investment world, you could look at tech itself, and that’s really fascinating and has very high growth, but you have to look at all other companies and say ‘are you going to be a beneficiary or a victim of these profound changes?' So it has really changed the way anybody who is informed looks at investing."
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