Things are changing more quickly than ever, especially in the world of tech investing.
For instance, six years ago when I joined Cabot cloud software was a term that needed explaining. Now, it’s just assumed that a software company (at least a good one) is leveraging the cloud in some way.
Similarly, terms like machine learning (ML) and artificial intelligence (AI) were a relatively new part of investing lingo a few years ago.
Not now.
And don’t even get me started on blockchain and crypto.
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We’re in the early stages of another big leap forward in technological innovation where the power of newer technologies (ML, AI, cloud, digital, etc.) is speeding things up so much that it dwarfs the pace of prior leaps.
This concept of faster innovation cycles isn’t something I came up with. Back in 1942 an economist named Joseph Schumpeter coined the term “creative destruction” and looked at innovation in the context of cycles.
The idea is that throughout history different industries have outsized impacts on the economy and completely reshape trends as varied as trade, wealth dispersion, demographics, and more. These innovation waves are getting shorter and shorter (i.e. innovation is happening more quickly).
The innovation wave most of us likely remember best is the growth of the internet, which spurred adoption of software, social media, e-commerce, etc.
Tech Investing: Then and Now
Now, we are into the early innings of the next big wave, which will be powered by a lot of the digital technologies that came about in the last wave, including AI, ML, IoT (Internet of Things), robotics, clean technology, automation, predictive analytics and extremely powerful data processing.
This wave of tasks that used to take days or hours now will be completed in minutes—or even seconds. And they will be done by software, robots, and the like.
That may sound a little farfetched. But it’s not. Companies like Microsoft (MSFT), Bill.com (BILL), Avalara (AVLR), Kornit Digital (KRNT), CS Disco (LAW), DigitalOcean (DOCN) and so many more are already doing it in their respective markets.
We’ve already seen how quickly some of these innovative companies can scale digital operations. The pace is mind-boggling, especially as compared to the pace of growth among old economy companies.
For example, Exxon (XOM) is almost 140 years old. It was once considered a monster company. Now, it has a market cap of $270 million. Not bad.
But consider that Snowflake (SNOW) is only nine years old and has a market cap of $101 billion, Airbnb (ABNB) is 13 years old with a market cap of $113 billion, Sea Limited (SE) is 11 years old with a market cap of $156 billion and Coinbase (COIN) at nine years old has a market cap of $66 billion. Suddenly, Exxon no longer seems like such a monster.
Even after a big pullback this week these growth stocks are still incredibly big relative to their age (and still will be even if they pull back more).
Now let’s consider lessons learned from some of the middle-aged companies that came into being entering the innovation wave that spanned the growth of the internet – or had some scale entering it – and recognized that the world was changing so they adapted to suit the times. Then they led the charge.
In this group (which is admittedly loosely defined) I include (among others) Microsoft, 46 years old with a $2.5 trillion market cap; Apple (AAPL), 45 years old with $2.6 trillion market cap; Amazon (AMZN), 27 years old with $1.8 trillion market cap; and Alphabet (GOOG), 23 years old with $1.9 trillion market cap.
These guys have crushed it and totally distanced themselves from other big tech companies from decades ago that, had they played their cards differently, could have been in the mix.
In that group of companies that seemed to have largely missed the boat let’s toss IBM (IBM), 110 years old with $104 billion market cap; and Hewlett Packard (HPE) and HP Inc. (HPQ), 74 years old with a combined market cap near $56 billion. There are many more.
The lesson here is that the leaders of one wave may or may not be the leaders in the next. This is extremely relevant today as investors survey the landscape of technology stocks they want to own through the next major innovation wave.
Their eventual success or failure will totally depend on how the world evolves, how management teams evolve the companies they lead, and how investors perceive the strategic paths companies take.
The constant challenge for us as investors is to try not to get too locked into a mindset based on the past and how things unfolded then, because the pace of change in the future is likely to be exponentially quicker.
As we hurtle toward the end 2021 and hopefully close the chapter on a very messed-up couple of years, try to keep these big-picture concepts of innovation, pace of change, and exponential growth in mind.
While we certainly don’t want to become cult-like, sidestepping normal stocks and chanting “the future is now, the future is now,” we do want to make sure to have exposure to companies that have a chance of being the next disruptors.
Finding the future leaders has been the goal of Cabot Early Opportunities since we launched the advisory service two years ago. If you’re interested in learning more about this advisory service, where our recommendations have an average gain well north of 100%, simply click here.
Do you own any of the aforementioned “new” tech stocks? Or any not mentioned above? Tell us about them!
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