The broadening impact of technology on society

We believe that technology is at the start of a remarkable cycle that will see computing woven increasingly into the fabric of everyday life in more intimate yet unobtrusive ways. The excitement around Apple Watch, with its ability to capture biometric information, is an early indication of this future. Innovation has the potential to reshape the boundaries of the IT business as we know it, creating significant opportunities for investors to acquire long-term value in the process. You only have to look at how far technology has come since the bursting of the dot.com bubble in 2000 to appreciate its capacity for innovation and change. Indeed, the ensuing transformation has been felt not only in the IT industry, but also across the sectors it services and across society as a whole.

Since 2000, the number of internet users has risen eight-fold – from 361 million to over 3 billion in 2014. At the same time the speed of these Internet connections have gone from dial-up modems to high-speed connections capable of carrying high definition video. The smartphone market went from not even existing to selling over 1.2 billion units per year in 2014.

For the companies participating in this innovation the effects have been similarly profound and transformative. Fifteen years ago, many questioned whether Apple would survive as a going concern, Google and Alibaba had just been formed and Facebook CEO Mark Zuckerberg was yet to graduate from high school. Collectively these companies now account for USD 1.4 trillion in market capitalization and generate nearly USD 90 billion in annual cashflow.

Behind the statistics is an equally compelling story of behavioural change, best exemplified by the internet itself which has revolutionized the computer and communications world like nothing before. From its origins as an obscure research project taken up by the US military in the 1960s, the internet has become a global broadcasting platform, a mechanism to disseminate information, and a collaborative tool that facilitates interaction between individuals or organizations irrespective of geographic location. Tools like Google have democratized access to information while Facebook and Twitter have given voice to hundreds of millions of people, sparking social revolutions.

We believe the next 15 years promise to be just as dynamic and lucrative as technology becomes ubiquitous and, increasingly, industry agnostic. So, what are the themes that will drive change and could, potentially, create an Apple or Alibaba of this brave new cycle?

Antiquated computing architectures are starting to be replaced by alternatives with richer features sets, higher availability, and lower costs due to features like centralized Cloud Computing and Software as a Service. Declining chip prices and increasing functional capability are driving an explosion in the “Internet of Things”, where intelligence is added to many every day devices, or personal items like as watches and jewellery. And, the “Industrial Internet” means that automation is starting to enable advances like more secure payment systems for personal or corporate transactions, self-driving cars, and intelligent robots.

We believe that with these advances come great opportunities for investors. What is most encouraging for long-term investors is that the more mature technology companies are embracing policies that reflect the more traditional assessments of value, namely the return of cash to shareholders.

Ultimately, this should provide a life-cycle roadmap for today’s innovative, faster growing technology companies that may currently have depressed profitability due to investments in rapid expansion. In short, the heavy capital expenditures of the last cycle do not need to be repeated and companies are now leveraging this installed capex to deliver profitability and cash flow at an accelerated rate.

But the new cycle, like the one before it, brings risk as well as reward. For every Apple there is a Blockbuster. While Steve Jobs and his team created a company with a market capitalization to rival the GDP of some countries, the video rental store went into liquidation because it was on the wrong side of disruptive change that redefined its role and killed its market. At the same time, the risks associated with technological innovation won’t be just relegated to the stock market, where risk assessment and risk taking are expected. Many social questions will arise and new threats will have to be dealt with. Artificial intelligence, robotics, self-driving cars, biotechnology, targeted medicine and many other innovations will ultimately impact all facets of our society. Ultimately, we believe successful investing in technology markets requires not only a deep understanding of the technology itself, but a careful consideration of these social factors as well.