In our view, the strength of a company’s business model is much more important than its sector. Although many of our core positions are technology-related, we also own several non-IT companies that are directly benefiting from the shift to digital. Below are three firms in our portfolio that we believe have excellent upside potential and that demonstrate the breath of disruptive possibilities in the digital economy:
• Avalara is a software company, which allows companies to more efficiently address a very boring and traditional problem—sales tax. With 12,000 tax jurisdictions and >$377 billion in sales tax in the United States alone, there is a growing need for software and Avalara processes 5 billion transactions per year and remits $18 billion in taxes. In a sign of a more connected and digitized retail environment, the Supreme Court ruled last year in Wayfair that a physical presence was no longer required for a state to be able to collect sales tax. Following the decision, several large states (California, Texas, New York) have begun to shift the standard to laws requiring remote sellers to collect and remit sales tax, which we believe should accelerate adoption of Avalara’s cloud-based compliance software.
• Teladoc is a classic example of a disruptive company that is leveraging technology to take market share from traditional incumbents. The firm is a telemedicine pioneer, utilizing videoconferencing technology to provide on-demand remote medical care. By eliminating the need for an in-person visit, it has substantially reduced the cost of delivery (telehealth visits cost $40 compared to $150 for a typical urgent care or doctor visit). What’s intriguing is that many of the patients who used the platform in 2018 were new to the service. We believe that these individuals are now much more likely to use the platform going forward, which should steepen the adoption curve.
• Rapid7 is a pure technology company—solving a problem that didn’t exist before the digital era. The firm develops security software for enterprises that monitors a customer’s network and identifies potential vulnerabilities. It is benefiting from strong market demand due to a rise in high-profile security attacks (e.g., Target, Equifax, Marriott) as well as the regulatory trend towards increased privacy and security. Recently, Gartner ranked vulnerability management as one of the top two priorities in security, suggesting Rapid7 has a long runway of growth given it currently monitors an average of only ~30 percent of a customer’s total IT environment. The company has several highly integrated products, offering a turnkey platform that identifies security vulnerabilities then prioritizes and automates an effective response. In short, Rapid7 is well positioned in a growing market and has strong internal catalysts to drive higher product adoption, cross sell and upsell.
The market intelligence firm IDC predicts that by 2021 at least 50 percent of global GDP will be digitized. In our view, it’s still very early in the technology cycle and we believe that only companies that adapt will be able to thrive in the future. As such, we think investors would be well served to reconsider the traditional style distinction between growth and value, and instead determine whether each company in their portfolio is digitally savvy enough to prosper and generate long-term cash flows.
James L. Callinan is vice president and portfolio manager at Osterweis Capital Management. Bryan Wong is an analyst at Osterweis Capital Management.