By: David Francis, CFA, Head of Equity, and Nabil Elsheshai, Senior Equity Research Analyst, Thrivent Asset Management July 01, 2016
As technology leaps forward at an ever-quickening pace, market leaders of the two leading secular trends – cloud technology and enterprise digitization – are steadily expanding their lead while leaving the competition in a cloud of cyber-dust.
Even though technology has been one of the worst performing sectors of the S&P 500 in 2016, there has been no slow-down in the pace of innovation. More likely, the slump in tech stocks is simply a normal reversion to the mean following a spectacular year in the market in 2015. We believe long-term prospects remain very promising for the leading innovators.
Cloud technology, in which data and applications are moved offsite to a centralized “cloud” server, has become standard practice among a growing legion of businesses. Cloud technology provides businesses with much greater agility and security of their technology infrastructure while allowing them to focus on their core competencies. The early leaders in this area include Amazon AWS, Microsoft Azure, and Salesforce.com, with ServiceNow and Google occupying specialized niches while trying to catch the leaders.
Digitization has come to encompass a large number of sub-trends that change how companies do business. For example, digitization entails automation of business processes, multi-channel interactions with customers (such as mobile), and new ways to market or interact with customers, such as social networking, videos, e-commerce, and other interactive mediums.
As these new platforms replace the older models, some of the early software and hardware titans, such as IBM, Oracle, EMC, Hewlett Packard Enterprise, and VMware, may see a steady decline in market share.
Who Are the Leaders in Digitization?
Digitization is somewhat ephemeral but, at its core, refers to key business processes which are now being challenged by new technologies in a variety of areas. Here are some of the key categories of the digitization trend:
- Customer aggregators. These are platforms that own the relationships with the customers and are able to leverage those relationships by extracting a toll for access to their users. The dominant players in this category are Amazon (e-commerce), Google (search and Youtube), and Facebook (social). Other contenders include Snapchat, Alibaba, Netflix, Uber, and LinkedIn (which was recently acquired by Microsoft; see “How Does the LinkedIn Acquisition Fit in the Microsoft Puzzle?”).
- Digital technology enablers. As more businesses move to digital marketing, ecommerce, mobile development, and interactive platforms, they need software and services to help make their efforts more efficient and effective. While there are many small players in this category, Adobe and Salesforce.com are the clear large cap leaders among digital technology enablers.
- Service providers. Among the consulting companies that help businesses digitize their expertise, Accenture has emerged as the dominant player. The company has developed a specialization in working with businesses to transform their current business processes to leverage digital marketing, ecommerce, automation and mobile platforms. While Accenture is the clear leader now, IBM, Capgemini and Cognizant are emerging players in the market, which is likely to have more than one winner.
- Machine learning/artificial intelligence. The next battleground in digitization is just around the corner, as machine learning and artificial intelligence become more prominent forces in giving businesses a competitive advantage. For instance, in the near future, businesses may use artificial intelligence to replace call centers for customer interaction, drive delivery trucks, or do product design. While there are currently many contenders in this area, the winners will likely emerge from among the companies with the most data, such as Amazon, Google, Facebook, Microsoft (with its recent acquisition of LinkedIn), and Salesforce.
As cloud and digitization technologies advance, we believe the largest players in each of these areas will continue to maintain an advantage over most challengers through economies of scale. Among the leaders, we expect competition to continue to heat up, as they leverage their considerable resources to develop next-generation technologies and acquire leading edge role players to augment their offerings in the ever-evolving digitization of cyberspace.
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