Survival of the innovators

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28/08/2020
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The technology sector continues to make the headlines, but the term “tech” is incredibly broad. Indeed it could be argued that most businesses need to be transitioning with some form of technology element in order to create a healthy 21st century business.

This has proven particularly evident this year as we have endured the COVID-19 pandemic. Businesses with strong balance sheets and sound business models going into the pandemic will be more likely to weather this storm, whilst those unprepared could find this period fatal.

Retail is a prime example of this. Many companies operating in the retail sector were already suffering pre-coronavirus, as they struggled to take advantage of technology as consumers moved online. However, those retailers that have spent the last few years building an online presence and investing cash in online have had an easier ride and are more likely to survive and even thrive once this period is over. A good example of a company that is in this transition period is NEXT, it has for some time been building its online presence and allowing other brands to sell through its online portal. This transition is still ongoing, but we would expect NEXT to continue to invest more in online in the months and years ahead to put it on a more sustainable trajectory. This strategy has allowed NEXT to weather the recent tough years for retail better than most. But the high street is littered with those businesses that have been unable to successfully make this digital transition.  Debenhams, Laura Ashley, Cath Kidston, Oasis, Game, House of Fraser, Jack Wills to name but a few, the list of retail causalities is a long one. Some of these businesses have been purchased by Frasers Group fronted by Mike Ashley who last week announced a £100 million investment in online (Retail Gazette), a move which should probably have been taken far earlier, but at least proves the group is now aware of how essential online sales will be to the future of retail spending. GymShark the privately owned online only Gym ware brand started in only 2012 and using social media influencers to promote its product, this week closed an investment round with a $1.3 billion valuation (Forbes). This is the kind of competitor that traditional retail is up against, highly adaptable, smart marketing, online only businesses. And this is exactly why traditional retailers need to innovate fast.

As Warren Buffet stated, “It is only when the tide goes out that you see who is swimming naked” and the pandemic has undoubtedly forced the tide out. It is now far clearer to investors which companies will be able to transition successfully into the digital age and as such, higher values are now being placed on these companies by the market. In order to survive, companies will have to accelerate plans to use more technology and innovate.

In recent months we have witnessed the cutting of dividends as companies try to preserve cash for the period ahead. Perhaps when earnings do return to normal, companies will learn from this and be more willing to retain earnings at the expense of dividends in order to re-invest in innovation and technology. This technological shift in how businesses operate has undoubtedly been accelerated by the pandemic. So how might we, as investors, take advantage?

There are a range of thematic ideas investors may explore, one such idea is cloud computing. We have all heard about software and data being run and stored in the cloud, this is not a particularly new concept. But the growing demand for more cloud power is never ending. AWS, Amazon’s cloud computing division and the power behind websites such as Netflix, has seen rising revenues. The below chart shows a First Trust cloud computing ETF that tracks the performance of companies primarily involved in providing cloud software and services. You can see the dramatic rise since the initial fall caused by the pandemic. As both small and large businesses shift to more online selling, cloud computing will continue to benefit. It will also be boosted by more of us working from home, as many of the applications and software which home workers use will be stored in and operated by cloud run services.

First Trust cloud computing performance

Another interesting idea which continues on this theme is the rise in demand for cyber security. As more people work from home, there will be potentially sensitive information stored and used on their devices due to the sector or nature of their work. Individuals are using laptops or smart devices via home broadband, which may not have the same levels of security as corporate internet. In addition, with more data being stored on the cloud, be it directly by the company or third-party apps - it can make an attractive target for hackers. We have seen numerous cases of companies facing both financial and reputational damage as customers’ private data has been stolen. British Airways suffered a serious cyber-attack in 2018 with 380,000 customers who had used the company’s website and app impacted (Computer World). And some attacks are on an even bigger scale. In 2016, Uber discovered hackers had accessed the data of 50 million riders and drivers resulting in Uber having to pay the hackers to delete the data (Bloomberg). As a consequence of these kind of incidences, companies are now willing to invest in cyber security to make sure data is safe. As the previous trend of more cloud computing continues, it would seem to make sense that cyber security spend will also rise.

Cyber security performance

Although recent months have been rocky for markets, and nervousness around the economic impact caused by the pandemic on equity markets will continue for the foreseeable future, there are some exciting ideas that investors can potentially draw upon for hope. The coronavirus pandemic will undoubtedly support more technological innovation moving forward. Some companies may find this period fatal but those who are able to adapt will emerge as stronger and better positioned businesses. Innovation will be key to survival.

 

Past performance is not indicative of future performance.

The value of an investment may fall as well as rise. You may get back less than the amount invested.

The information contained does not constitute investment advice. It is not intended to state, indicate or imply that current or past results are indicative of future results or expectations. Full advice should be taken to evaluate the risks, consequences and suitability of any prospective investment. Opinions provided are subject to change in the future as they may be influenced by changes in regulation or market conditions. Where the opinions of third parties are offered, these may not necessarily reflect those of Rowan Dartington.

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