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Widespread tech innovation: don’t miss the forest for the really big tree

We explore the innovations driving a multi-decade journey of disruption and highlight the importance of in-depth research to capturing this opportunity.

 

The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed. For professional, institutional, or accredited investors only. Please refer to the risk section below.

We’re on the cusp of the next big tech wave and, in our view, we’re all poised to benefit. Innovation is constantly improving the lives of people all across the globe, transforming our homes, schools, businesses, and daily lives. From digital payments helping to make finance more accessible, to the cloud and the Internet of Things (IoT) boosting efficiency everywhere from farms to factories, to artificial intelligence solving problems from auto safety to disease diagnosis — the world’s progress is grounded in innovation.

We’re at the beginning of a multidecade journey of massive disruption and we believe investors need to be positioned to harness the tech driving this innovation.

A long runway for growth

But the tech sector’s strong recent performance has some investors asking, “are we too late?”. In our view, the answer is an emphatic “no” and the innovation trend continues to offer a long-term secular opportunity. Though areas of the market currently have elevated valuations and the growth curves for some innovations may have accelerated or even plateaued, we think there is still a long runway for growth ahead.

Tech innovations like digital payments, AI, the IoT, the cloud, and digital transformation are still early stage, in our view, and are increasingly disrupting every segment of the economy, extending far beyond technology and health care. In fact, we believe traditional exposures to technology are too focused on big tech names and lack the research depth to capture the full investment opportunity in the years to come. As the world rapidly changes, we think investors’ tech exposure needs to evolve along with it.

Digging deeper to find hidden opportunities

In the video above, we explored the technologies behind the coffee bean, highlighting innovations from farmers harnessing cutting-edge sensors in their soil to power new data insights from AI to consumers using advanced digital payment methods to purchase a cup of coffee. Innovation has far-reaching impacts on consumers, businesses, and society as it creates opportunities for everything from the raw materials up through the supply chain to a technology’s numerous end markets.

We believe the key to accessing these opportunities is to take a targeted, active approach to identifying the winners and losers of long-term structural innovation trends across industries. We harness our deep and broad research resources to discover the many underlying opportunities hidden beneath the surface of well-known tech names. In our view, this helps avoid trying to pick the winners of a megatrend and instead looks to invest in the many winners across the supply chain. As supply chains become more and more integrated, particularly in Asia, companies have many different end markets. For instance, microprocessors used to sell into one industry, but they now fuel countless other sectors.

Innovation beyond the headlines

Critically, we think many investors are missing the full opportunity of the firms powering these enduring themes. Below are three examples of areas where some investors worry the market is overly exuberant, but that we think continue to have robust growth opportunities beyond the headlines.

 

Electric vehicles

There are several high-profile electric vehicle (EV) chains that are rapidly growing. But competition is heating up from many other companies, including established automakers transitioning from combustion engines to EVs. This is a long-term secular trend that is highly likely to persist while having an important impact on the environment and society as a whole. However, with elevated valuations, many investors are wondering how to access the opportunity it presents.
The hidden opportunity

While the market focuses on the automakers, we’re more interested in the massive demand they’re driving for the numerous components these cars will require (Figure 1). For example, by 2030, electronics are likely to be 45% of total car cost.4 Regardless of who wins the electric vehicle war, we believe the companies supplying the picks and shovels of innovation — the companies mining nickel for batteries, the advanced chips manufacturers, and the AI firms, among many others — will continue to have a growing market for their products, including broader use cases beyond EVs.

Figure 1

Automation

The rise of automation is often thought of in terms of factories replacing workers with more productive robots. After all, the world is not growing as fast as it once was — and we need innovation to offset the slowdown. But the opportunity this technology offers stretches far beyond factories and robotics.
The hidden opportunity

Even the headline trend of automation increasing productivity has numerous underlying themes, including machine vision, 5G, the cloud, and AI to capture, transmit, store, and analyze an exploding amount of data. These opportunities are powered by many small companies across the globe, requiring investors to have substantial regional and industry expertise.

But automation is also increasingly enhancing decision making, adding convenience and efficiency to myriad consumers and businesses. Entertainment companies use AI to improve customer content choices, insurance firms automate their customer service, and advertisers use machine learning to automate customer engagement decisions, among many other examples. In fact, AI has the potential to add up to US$5.8 trillion in yearly value to 19 industries (Figure 2).5

Figure 2

E-commerce

The long-term growth of e-commerce has continually brought increased convenience and accessibility to new markets, companies, and customers. The benefit of this trend came into greater focus in the wake of the pandemic. However, as a few of the largest companies in the world are harnessing the e-commerce theme, some may think that we are in the late stages of this disruption and the opportunity has passed us by. But, in our view, there are still many areas for e-commerce to grow.
The hidden opportunity

The COVID-19 health crisis revealed that there is still a long runway from growth in numerous parts of the e-commerce theme. Areas like grocery delivery, digital payments (Figure 3), and sustainable packaging are still very early in their growth curves. For example, grocery delivery grew by 43% in 2020 but still has less than 50% market penetration.6 This growth was powered by demand that was orders of magnitude higher than companies had seen prior to the pandemic, shifting up the growth curve and offering them the scale to invest in this area. In some countries, like China, the community group buying model is expanding the market to previously untapped populations with community leaders buying in bulk and then distributing goods to the community.7 In addition, the companies enabling the cloud and digital transformation continue to have significant room to grow as e-commerce reaches new sectors and segments of society.

Figure 3

Bottom line

In our view, the key to investing in the long-term secular themes driving tech and innovation is to look beyond the hype and the news flows. We cannot stress enough the need to dig deeper into fundamentals and understand “the trends beyond the trends” that can sustain growth for the long term. We think investors need the depth and breadth of research to harness the opportunities innovation creates beyond the traditional “innovative” sectors.

Tech progress has marched on through the pandemic, trade wars, and economic cycles. This pervasive innovation continues to disrupt industries and drive growth while, in our view, making the world a safer, more efficient, increasingly equitable, and overall better place. We believe the question should not be “Have we missed it?,” but rather “What’s next in innovation?” and “How do we capture that growth?.”

about the authors

Anita Killian
Anita Killian
Anita Killian, CFA
Global Industry Analyst
Anita has over 30 years’ experience investing in the technology sector, with a specific focus on the semiconductor and IT hardware industries.
Yash Patodia
Global Industry Analyst

Yash has over 10 years’ experience covering the technology sector, specializing in the software and internet sectors.

Bruce Glazer
Global Industry Analyst

Bruce has over 25 years’ investment experience in the technology and business service sectors, with specialisms in the analysis of transaction and information processing and information technology professional services.

Michael Masdea
Michael Masdea
Michael Masdea
Head of Investment Science

Michael has over 20 years’ experience in following industries characterized by rapid change and disruption. He is also the head of Wellington’s Investment Science Group.

Brian Barbetta
Brian Barbetta
Brian Barbetta
Global Industry Analyst

Brian has been covering the technology sector for over 10 years and has particular focus on internet and video game software companies, undertaking research and managing investments across both public and private equities.

1Sources: Company reports, Wellington Management. Data as of 31 December 2020. | 2International Energy Agency, 2021. | 3Source: STiR Coffee and Tea International, September 2018. | 4Sources: IHS, Deloitte Analysis. | 5Source: McKinsey & Company, “Notes from the AI Frontier,” 2018. | 6Source: eMarketer, March 2021. Penetration in online grocery is defined as consumers who have used it at least one time, meaning there is even more potential for growth within the existing market. | 7Source: Pandaily, “Why is the Community Group Buying Model Surging in China?,” December 2020.

Please refer to the investment risks page for information about each of the following risks:

  • Capital risk
  • Concentration risk
  • Currency risk 
  • Common stock risk
  • Emerging markets risks

Our approach to tech and innovation

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