Sharing Thoughts

By Georg Krijgh

The digital revolution perhaps marks the greatest disruptive transformation in the history of mankind so far. The evolution of human intelligence spans about 7 million years, roughly from the separation from the genus Pan. The emergence of almost limitless artificial intelligence is now starting to have a significant impact on society. The unfolding of machine learning is proceeding at a revolutionary speed. It is likely to cause more change to the way we live over the next few decades than it did over the past few centuries.

A good way to get an understanding of what is happing is by studying today’s relevant businesses. During these summer days, I’m spending most of the day reading company reports and listening to the Q2 earnings conference calls. These insightful discussions are open to anyone on the Investor Relations websites of every public company. The staggering growth of some firms is showing the shift of behavior; for example, Shopify reported revenue growth of 97% in the second quarter and Amazon’s revenues increased by 40%. The fact that Amazon, with a market value of USD 1.5 trillion, can grow at such a speed is unprecedented.

We are experiencing the Cambrian explosion of cloud-based technologies. Of software connecting to software and of unsupervised learning at a pace so fast that those looking in the rearview mirror are at risk of being replaced by machines.

The role of software is increasing at an accelerated pace. Satya Nadella, CEO of Microsoft, said last week that “the last five months have made it clear that tech intensity is the key to business resilience. Organizations that build their own digital capability will recover faster and emerge from this crisis stronger.”

One positive effect of running a distributed business is that the global pool of talent can be accessed irrespective of where a person happens to live. The decentralized way in which many people are able to work is increasing the measurability of every person’s added value and decreasing the benefits of, for example, having a charismatic character. Today, business leaders know better than ever who is relevant and who is replaceable.

Once, the leaders of companies were mainly the well-adjusted social people, those with the personality to move up the corporate ladder. This social setting is getting upgraded now as the autodidact hackers who create art by writing code release their creations into society. Their influence is derived from the beauty of the virtual worlds they are building; masterpieces that eat the role of physical assets as well as that of humans.

While this technological revolution is chaotic and disruptive like any transformation, there will also be many positive effects on the quality of our lives. For instance, we own shares in Livongo, a firm that leverages data to empower people with chronic conditions such as diabetes to live healthier lives.

Today’s younger companies are growing faster and reaching scale at record speeds. Most of these companies are cloud-native and using machine learning to get insights from data. Eugene Wei, a former product developer at Amazon, Hulu, and Oculus VR, wrote this week:

“TikTok didn’t just break out in America. It became unbelievably popular in India and in the Middle East, more countries whose cultures and language were foreign to the Chinese Bytedance product teams. Imagine an algorithm so clever it enables its builders to treat another market and culture as a complete black box. What do people in that country like? No, even better, what does each individual person in each of those foreign countries like? You don’t have to figure it out. The algorithm will handle that. The algorithm knows.”

The current discussion about TikTok shows that technological supremacy has become a geopolitical matter. Machine learning, computing power, cybersecurity, and space dominance, amongst others, have become essential themes of national defense. The arms race in these fields will remain an important topic for the rest of our lives.

In 2030, when looking back at 2020, we will be amazed that some of the most valuable businesses were still smaller private ventures today. While I think that the businesses in which we own shares will thrive, sentiment in markets and stock prices will forever fluctuate wildly. Market participants who are selling shares of great businesses based on someone’s opinion that valuations are rich are likely suffering from a failure of imagination where certain businesses, as well as our species, are headed.

I am writing this update in the garden of a medieval building and from underneath an old oak tree that has been here before 1788, the year of birth of Bank of New York Mellon, the oldest company on this year’s Fortune 500. It helps me to get perspective as businesses continue to come and go. The free market is always destroying the old economic structure and creating a new one and I feel we have to be on the ball closer than ever before. Therefore, Jeff Bezos continues to remind his team that today is Day One and to keep acting like a startup.

Now it’s time for me to listen to the next company’s earnings report. All I need to do is to open my Spotify app. This is the most interesting time of my investing life so far.

The massive global scramble to digitalize both private and professional matters is creating big winners and losers. Today, we are at a shockingly early point in the digital transformation.

The economy of the internet is still only a single percentage of global GDP. We are gradually heading to a place where the GDP of the internet will provide the majority of economic activity. This big social change is like a huge tailwind driving the most successful businesses in the next decade.

E-commerce penetration in the U.S. grew from 5.6% in 2009 to 16.0% in 2019. Then it grew about 30% in April. There are 5.7 billion adults on the earth of which about 4 billion have a smartphone. The penetration of e-commerce is still low in most countries because people lack good internet and digital tools. If one would like to buy a handmade fabric from a person in Senegal online, then there are quite a few complications with regard to the exchange of goods and money. However, the teams at companies such as Starlink, Stone, Stripe, Shopee, Square, and Shopify, are determined to provide the most efficient platforms that allow and urge everyone to participate.

As digital commerce is growing more businesses are building a direct relationship with the consumer. For instance, L’Oréal’s chief digital officer said “We are setting ourselves up for a world where half of the business is e-commerce and 80% of customer interactions will happen online.” L’Oréal quickly shifted its advertising and marketing spending online, which led to an increase from 50% to 70% of its total since the start of the pandemic. As a result, digital advertising on platforms such as Instagram, Amazon, Cardlytics, Spotify, and Roku, is set on a trajectory this year to overtake spending on traditional media.

Changes are clear beyond commerce; the pandemic has caused a massive acceleration of remote education and telehealth which grew from an 11% penetration in 2019 to about 46% currently. The pandemic has increased the need for technology that enables on-demand virtual urgent care, virtual visits, remote personalized monitoring, and collection of data to improve care driven by machine learning.

The investor does not need to have an opinion on the general economy. It does not matter what the general economy or the stock market will do. What matters to the investor is whether one belongs to the group to whom wealth is shifting.

The pandemic is accelerating existing trends to digitalize. We further concentrated on technology businesses that benefit from current developments and that provide winning platforms in e-commerce, cloud computing, gaming & e-sports, digital payments, and machine learning.

On April 27th, Loren Padelford, Chief Technology Officer of Shopify, the e-commerce platform, tweeted ‘this crisis is a time machine that brought 2030 to 2020. It accelerated the digital transformation on many enterprises who weren’t ready. We have helped thousands of large retailers unshackle from legacy systems and start writing their next chapter.’ Over the past month, Shopify experienced strong volumes every day. Heinz and Lindt, amongst others, announced their online stores on Shopify to build direct consumer relationships.

On April 29th, Satya Nadella, CEO of Microsoft, said ‘As COVID-19 impacts every aspect of our work and life, we have seen two years’ worth of digital transformation in two months.’

While there is a large audience for doomsday scenarios about the virus, unemployment, corporate defaults, government debt, money printing, etc., the intelligent strategy is to co-own a focused selection of great companies that will thrive.

The strong businesses seem to emerge stronger from this crisis.