The nature of Megatrends is that they develop relative slowly, driven by bottom-up “local” events that slowly gain in critical mass until these trends come to define large-scale and pervasive change. John Naisbitt wrote in his book “Mega Trends 2000” that large social, economic, political, and technological changes are slow to form, and once in place they influence us for some time – ten years, or even longer.
It is Bill Gates of Microsoft fame that wrote in 1996 that “We always overestimate the change that will occur in the next two years and underestimate the change that will occur in the next ten”.
Identifying new trends is always difficult. It was in November 2022 that ChatGPT as an artificial intelligence (AI) chatbot was launched. They achieved a user base of 100million in two months, compared to TikTok that took nine months and Instagram thirty months to achieve same size user base. ChatGPT has literally taken the world by “storm” – how do we as investors benefit from such new trends? AI has moved mainstream into the world of consumers and no longer the domain of software engineers and developers solving complex challenges in engineering.
We use an approach adopted from a venture capital (VC) investor which approach combines the Megatrends (Mobile Internet, Sustainability, Digitisation) with company-specific attributes to identify companies fit for investing over the long term. This approach is labelled the 4 “Ps”
The first “P” is for People and in our view the most important “P”. There is no shortage of interesting ideas in the world, but it’s always a company’s leadership ability to execute against the opportunity that determines success or failure. Our experience is that “winners” mostly “stay on top” and finding new ways to keep on winning. There are always exceptions to the rule – Blackberry, Nokia and Xerox comes to mind.
A combination of Research and Development oriented CEOs with strong operational COOs (or CFOs) with disciplined managerial and execution skills should not be underestimated. This might explain why innovative CEOs like Elon Musk, Steve Jobs and Bill Gates were paired with operational professionals such as Gwynne Shotwell, president and COO at SpaceX, Tim Cook, former EVP and current CEO at Apple, and Paul Allen, co-founder, and CEO at Microsoft, respectively. Jeff Bezos of Amazon might be the exception; he is research-centric and possesses strong implementation skills – his successor, Andy Jassy, has yet to find his feet, in our view.
The Second “P” stands for “Product.” We want to invest in companies that are leaders in what they do, have a proprietary product or service, or better yet, a “one-of-a-kind” type of business. Said another way, a company needs to have a claim to fame. This claim to fame could be in an industry where barriers to entry are high or have a high capital intensity to keep out undercapitalised businesses. One example is industrial gases – stringent laws and regulation related to the manufacture, storage and transportation of industrial gases are likely to restrain the entrance of new participants and hence the relatively high barriers to entry and favourable industry structure towards the few participants that has emerged following a decade of large mergers and acquisitions.
As investors we want to back businesses that not only survive, but thrive, during their corporate evolution or lifecycle. Examples of companies in this category include Tesla, Airbnb, Uber, Roblox and The Trade Desk – the list is by no means complete.
It brings us to the third “P” – it stands for “Potential”. It is all how large can a company become? It goes together with the second “P” and great companies keep evolving and grow what is called total addressable market or TAM. Determining total future market potential is important to perform longer-term cash flow forecasts and valuations to determine a company’s fair value.
Megatrends influence our analysis as they provide “tailwinds” to accelerate growth. Often, the companies with the most potential are where the biggest problems are —the bigger the problem, the bigger the opportunity. Cloud computing is an excellent example in our view, providing significant opportunities for companies such as Amazon, Microsoft, Alphabet (or Google). Oracle as providers of infrastructure or platforms to help clients compute and store data, and help developers build, test, and deploy applications.
These include equities and property. They’re usually open to market fluctuation but tend to provide higher returns over the long term.
Generally, defensive assets provide you with a relatively steady return and, therefore, income. However, some growth assets are usually needed to keep your funds growing during your retirement, so they last longer. With an account-based pension, you can mix defensive and growth assets to a ratio that you’re comfortable with.
The last “P” is for “Predictability” — how visible is the company’s growth and what kind of operating leverage does it get with scale? For most new businesses, having any degree of confidence in the forecast is a challenge. We are looking for business models that create predictability, whether it’s through recurring revenue streams, high-level of after-sales service and support, or a clear articulation of operating metrics that drive the business.
Software is an excellent example in Technology where predictability has been enhanced with the emergence of the “software as a service” or SaaS business model. Companies such as Adobe, Intuit, Dropbox, and closer to home Xero, derived most revenue today from a subscription-based service. Gone are the days of an annual license fee and the upgrade on a compact disc (CD) posted to you as customer.
We are most intrigued by streaming services, both audio and video, and how subscription-based business models have influenced consumer preferences from purchasing and downloading songs to “renting” (streaming) vast libraries of music (in the case of audio) that are available on mobile devices.
Written by Johan Snyman
Portfolio Manager of Global Equities
Oracle Investment Management
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