Digitalisation has set an acceleration in structural trends towards more technologically integrated ecosystems, higher AI usage and a more rapid transition to Cloud.
In software, data analytics are becoming an important next frontier to explore and where competition will become increasingly more ferocious.
The semiconductor industry is at a critical stage both in terms of slowing Moore’s Law, but also increased technological fragmentation driven by higher geopolitical stakes, leading to potentially diminishing scale economies.
Quantum computing, whilst not directly a beneficiary, will likely see increased investment focus by the major nations as part of the geopolitical technological race that is shaping up.
Online gaming trends have been amplified, and have potentially led to recruitment of an additional new user base, further strengthening the long-term attraction within this segment.
Cyber security , whilst not directly a beneficiary, will likely see an increased investment focus by the major nations as part of the geopolitical technological race that is shaping up.
Medium-Term opportunities in a post-pandemic world
In this series we look at the structural growth trends that have emerged and how they are captured in our thematic mega-trend framework.
As Microsoft’s CEO Satya Nadella famously said early in the pandemic at an earnings call in April 2020: “we have seen two years’ worth of digital transformation in two months.” Since then we gathered a similar sentiment from the IT service providers and application-level Cloud companies that all confirmed an accelerated transition to Cloud, in particular. Within a broader digitalisation trend, we also think that AI is nearing a mainstream adoption stage, which is happening across both Cloud and increasingly on the edge. We are also cognisant that accelerated digitalisation opens up many new opportunities in the software world for example; experience, collaboration or full stack observability within infrastructure software, to name a few.
This past year has also arguably brought in focus a new generation of software companies. Snowflake, the US cloud based data warehouse firm that IPO-ed in September 2020 could be seen as the new Oracle, in the landscape of generic enterprise software. And yet, it brings a novel pricing model based on usage (as opposed to subscriptions), which might have set the direction of travel for Software as a Service (SaaS) companies going forward. Additionally, it competes in what is set to be the next frontier for digital enablers – data domain and analytics.
In semiconductors, we might be at the start of an upcycle, owing to the high-performance computer applications (AI alongside 5G) and new mobility trends. In our view, electric vehicles’ adoption has reached an inflection point. Arguably, it already happened in Europe on the back of the strong regulatory momentum in the second half of 2020. The market might also be underestimating an additional boost from the semiconductor growth associated with the new types of vehicles. It is worth noting that the whole semiconductor ecosystem is undergoing a structural change, with Moore’s law continuing but slowing. Hence the investment opportunities and innovation are present across the whole value chain, including design. Some would go as far as to hypothesise about a looming renaissance of semi/hardware, supposedly seen in proliferation of disruptive start-ups, despite software continuing to “eat the world” at present.
Gaming has also seen a shift in market perception, as seen in the multiple expansion. In 2020, there were a couple of successful IPOs, leveraging a COVID boost to earnings. Such investor appetite has helped to improve the market sentiment. More importantly, we think through COVID, gaming has reached a wider audience and potentially shifted a societal attitude towards accepting gaming as a form of socialising. This shift, alongside the proven success of such virtual events as Fortnite’s concert featuring Travis Scott has arguably given a new level of energy to the old conversations about metaverse. Roblox’s pending direct listing is fitting this context, while continuing the trend of user-generated content coming into various forms of media and entertainment.
In cybersecurity, the SolarWinds hack has given a thematic boost to cybersecurity companies. Whilst we caution against any immediate material boost to cybersecurity firms revenue streams, we believe that corporates will be increasingly allocating more of their IT budgets towards cybersecurity investments, to ensure that their businesses are more resilient to any cyber-attacks. This is particularly more important as the pandemic crisis has led to a faster migration of many businesses towards more online activity. We could think about three implications going forward. Firstly, there could be an increased acceptance of new solutions from the US government agencies. Secondly, we might see the new brand equity earned by the first responders (e.g. Microsoft, FireEye) translating into an increased customer awareness and ultimately, customer orders over time. Lastly, given the nature of the SolarWinds hack (supply chain), there have been renewed calls for a platform type of approach to security versus individual solutions. It is also evident that the pandemic has increased the cyber perimeter, and remote working has brought new challenges to the old issues (e.g. human error, phishing attacks). That is before we think about the medium-term and emerging trends e.g. AI-powered attacks/ automation or quantum communication/encryption.
Quantum computing is likely to impact every sector over the coming decade, in our view. Within the next five years, we expect an earlier adoption in selected applications, e.g. material science/chemistry and pharmacy/drug delivery. We have already seen quantum computing as a service, especially cloud-based, getting closer to reality. Furthermore, quantum computing also bears significance in the geopolitical context: there is competition ongoing between China and the US, as well as other major nations globally – without a clear front runner at this stage. Overall, we would expect more quantum computing-related investments which could both open up new opportunities, but also lead to seismic shifts in some of the established players' competitive positioning, which could weaken their opportunity set in the long term.
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Within a broader digitalisation trend, we also think that AI is nearing a mainstream adoption stage.