Although traditional investing philosophies have long relied on the distinction between “growth vs. value,” we believe both categories are becoming irrelevant. As the economy becomes more digitized and businesses are disrupted at an increasing rate, a low multiple on current earnings (i.e., a classical view of “value”) is not a bargain if the business is structurally disadvantaged going forward.
Rather than looking at the world through this traditional lens, we think a more constructive framework is “digital vs. decline." In our view, digital businesses have substantial structural advantages, making them far more likely to prosper and generate long-term cash flows than incumbents who fail to adapt. Moreover, we feel that sector classification is now materially less important than the strength of a company’s business model.
Techceleration Is The New Normal
Technology has always progressed exponentially (as per Moore’s Law, processing power doubles every 18 months), but the pace of innovation has increased recently as the digital landscape has evolved. With the proliferation of devices (PC, smartphone, IoT, cloud, etc.) technologies are increasingly able to leverage one another to accomplish tasks that previously would have been impossible, creating a virtuous circle. Machine learning algorithms, for example, require large data sets that are sourced from online applications and are generally analyzed using cloud-based technology. This is just one of many examples where each individual component enables the other to achieve its full potential—a technological symbiosis that benefits the entire ecosystem.
A recent research report from Bank of America Merrill Lynch (Source: Transforming World—The Next 5 Years,” Bank of America Merrill Lynch, October, 2018) argues that the next five years will see the fastest rate of technological change ever, citing the following factors:
• Data doubles every 2-3 years
• Computing costs continue to decline
• Emerging 5G cellular network will facilitate a global, connected world
Not surprisingly, the report also predicts that the forthcoming digital transformation will affect a wide range of industries, providing a strong tailwind to a few obvious sectors (e.g., technology hardware and software) and equally strong headwinds to others (e.g., old media companies and traditional healthcare providers).
Adoption Rates Continue To Climb