Identifying the most interesting and investible ‘tech’ themes offers considerable growth potential to investors
Humans are terrible at predicting the future. Our tendency to simply extrapolate forward from our current state invariably underestimates the real extent of change. This is particularly true when it comes to technical progress. Mankind’s ability to be more productive with resources and labour has grown exponentially, consistently exceeding expectations and allowing unimaginable growth in populations and living standards.
We need only look at history to know tomorrow’s world is going to be very different. Identifying the most interesting and investible ‘tech’ themes offers considerable growth potential to investors.
Invention is great, innovation and diffusion are better
The bulk of economic growth over time – around 87.5% according to Nobel prize winner Robert Solow’s estimates – ultimately stems from technological change. Technological change is driven by the cycle of invention, innovation and diffusion. Invention is the initial discovery of a new technology; innovation encompasses how that invention is improved upon; and diffusion is the spread of a technology through industry or society.
In business terms, the distinction between invention, innovation and diffusion is critical. Even the most useful inventions offer little commercial benefit if they are not innovated and diffused appropriately. Take the development of the light bulb, for instance. It may be synonymous with Thomas Edison but Edison did not invent it. He improved Humphry Davy’s original design and brought it to the mass market. His innovation of the light bulb led him to form the Edison Electric Light Company, which later became General Electric.
A case study in innovation: Apple
When Apple released its iPhone in 2007, the mobile phone market was saturated. Smart-phone technology had been available for years. What Apple brought to market was not new – but it would prove to be an exceptional innovation on what was available. Its ‘uniqueness’ lay in the combination of its touch-screen design simplicity and the ease with which consumers could browse the web, ‘sync’ music with their existing iTunes collections and download new content via its ‘App Store’. Fast forward a few years and the iPhone has become one of the most successful product launches of all time. Apple recently overtook Microsoft to become the largest technology company in the world by market value.
The age of mobile connectivity
We have entered a new phase in computing that has much further to run: mobile connectivity. Morgan Stanley analysts believe that mobile internet usage is ramping up substantially faster than desktop internet usage did, with mobile usage predicted to exceed desktop within five years. Significantly, Apple has proven that consumers are prepared to pay for content on the mobile internet. This is an important move away from the desktop model, where there was greater expectation of free content.
There will be winners across the value chain as this trend grows: device makers, such as Apple, have already been huge beneficiaries, but component makers and content-rich social networking sites also stand to benefit. The average mobile phone usage pattern is mostly voice, while the average smart-phone is mostly data. Infrastructure specialists like Cisco Systems stand to benefit from this huge growth of demand on network architecture.
Playing the supply chain in mobile devices
Investing successfully in technology takes innovative thinking. Apple has been a great success story and is now rated accordingly by the stock market. A better way to fully benefit from the incredible market growth in mobile connectivity is to invest in companies that make components for smart-phones. This is what makes SanDisk such an attractive stock. SanDisk makes the memory for a wide range of mobile devices, allowing investors to benefit from the growth in the industry without tying their colours to a particular smart-phone brand.
Computing in the clouds
Computers have been getting smaller over the years. Next, they may be about to disappear completely as we move towards the use of dematerialised, on-demand data, or ‘cloud computing’. Rather than saving data locally to hard storage, it is saved to ‘the cloud’ (external data centres) and accessed on demand via the internet from a range of devices. As increasing bandwidth from the likes of Cisco begins to make cloud computing more economically viable, IT hardware will also adapt. Without needing large amounts of storage locally, business computers will become smaller, and the proliferation of wireless internet will aid portability.
One way to access this emerging trend is to invest in companies who specialise in desktop virtualisation, such as Citrix and enterprise software developers who can integrate corporate process, such as Software AG.
From smart-phones to smart cities
In an increasingly digital world, the competitiveness of a city or country is increasingly a function of its digital as much as its physical infrastructure. Some governments, like South Korea, have recognised that they are unable to compete with lower-priced Chinese labour, so they are investing heavily in knowledge-based enterprise. Scheduled for completion in 2015, the futuristic city of Songdo is intended to be a technologically-advanced business hub for North-East Asia.
Songdo is an integrated, ‘smart’ city, with wireless networks and radio-frequency identification linking major information systems – residential, business, medical and governmental. Residents will have smart-phones they can use to pay their bills, access medical records or just open doors.
Some winners are immediately apparent. Microsoft is already involved in software programming, while infrastructure companies like Cisco look set to benefit. An indirect beneficiary will be semiconductor equipment manufacturers such as Applied Materials, who produce the equipment necessary for chip manufacture. The world is going to need a lot more semiconductor foundries to produce an ever greater number of chips.
Technology and emerging markets
Technology will be both a beneficiary of, and contributor to, growth in emerging markets. The use of computers in emerging markets is expected to double between now and 2013. We can expect a mixture of developed market players and local stocks to benefit. China is one to watch on the innovation front. The Government can channel funds very effectively to strategically important sectors. For instance, recognising their dependence on oil imports, China has invested heavily in the development of electric cars and renewable technologies.
Growth potential
The business world has changed dramatically in the last 30 years and there is every reason to believe it will do so again in the next 30. It is difficult look too far ahead, particularly from an investment standpoint, as the companies that benefit from the latest academic breakthroughs may not have even been formed yet.
We have provided a taste of some of the areas where real value could be found. Cloud computing, mobile internet and the development of digital smart city living are interesting and investible themes right now, but have significant growth potential still to come.
Tom Stevenson, investment director at Fidelity International
