Trifecta is an expression that derives from horseracing, when bettors try to predict the first three finishers in a race. However, in an investment context, Mr Braun explained, the tech trifecta is not about betting in any way, but about trying to forecast, through fundamental research, which themes or industries might be the most dominant over the long term. “In this case, there are technology and communication-related industries that we follow very closely from an investment point of view,” he said.
The companies that develop and sell these innovations effectively should have the market power to maintain profitability, even in difficult economic conditions. With profits comes the ability to invest in the products that can face future challenges and opportunities. The concept of “pricing power” that is intrinsic to this dynamic was discussed in a previous edition of the “Investing for the long term” podcast.
“Semiconductors are the backbone of all future innovation and technology,” said Mr Braun. He highlighted the example of the automotive industry, where as many as 3,000 chips can be used in each vehicle. The prevalence of this technology is set to rise, and these chips will become more specialised and sophisticated, with each company able to create niche levels of pricing power within complex value chains.
“Cloud computing is a game-changer for many companies,” Mr Braun noted. He highlighted the examples of Amazon and Microsoft, which reinvented themselves from an online retailer and a slow-moving software firm, respectively, into leaders in this lucrative market. Downstream, the likes of the automotive industry is being changed by constructors being able to collect and analyse data generated by each car, using the cloud. “There is a reason why we define the cloud as the ‘fourth industrial revolution’,” he added, a theme which was addressed in a previous “Investing for the long term” podcast.
A development linked to the cloud is SaaS, which has become an integral part of the way many businesses (and increasingly consumers) access IT functionality. Hardware costs are kept to a minimum, clients can purchase just the software they need, with this being kept up-to-date continually at the centre. From business applications through to gaming, the possibilities are considerable and growing.
“The pandemic has increased consumer acceptance of using online services, even in areas as important and personal as health,” said Mr Braun. He cited the example of biopharmaceutical company AbbVie, which offers software that allows patients with diabetes to monitor their blood sugar level directly on their smartphones.
“Compared with the days of the dotcom bubble, tech companies today are more aware of the need for business models that rely on recurring earnings,” he said. Many of the tech trifecta companies have this essential element, in which customers come to rely on services that they are reluctant to let go, and so carry on paying month after month. “Technology companies, from an investment point of view, are often much like utility companies, as these services become omnipresent,” Mr Braun said. “Yet, the intangible assets that are often at the heart of these operations make it much more difficult to understand the true value of those companies for all investors – including investment professionals, underscoring the importance of a long-term approach, and of fundamental research,” he added.
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