Jun 22, 2018
The Expanding Presence of Technology
“Every company today is a technology company – they are either in the technology business or they are becoming more dependent on technology to help run their business.” Len Mitchell, Meritage Sr. Portfolio Manager
The advancement in technological capabilities over the past ten years has been staggering. Even for those who might consider themselves tech-savvy, it is getting more challenging to keep up with the pace of change.
From an investment standpoint, the Technology sector has reclaimed its position as the largest of eleven business sectors in the S&P 500, after sixteen years of rebuilding from the rubble of the Tech Bubble. Over this time we’ve seen both the maturation of highly successful technology companies (Google, Apple, Amazon) and the explosive growth of newer public and private companies around disruptive technologies (Uber, Airbnb, WeWork, Spotify).
Technological advances in recent years have impacted our lives in ways that were once unimaginable. Businesses involved in areas of communication, entertainment, manufacturing, transportation, education, health care, personal finance, shopping, and travel, among others, have all had to incorporate new ways of doing things to remain relevant to today’s global consumer.
Each day we learn of new technology applications that sound like science fiction. Deep learning programs, a subset of artificial intelligence, are producing creative content like classical symphonies, oil paintings, and newspaper columns. Law enforcement officials recently captured a serial killer from 30 years ago by analyzing DNA from the growing network of online genealogy sites. The Department of Defense has developed the equivalent of a Chess-playing Watson (IBM’s artificial intelligence capability) that outperforms our best pilots in flight combat simulation. Autonomous driving vehicles are receiving input from sensors embedded in road pavement, and robots are developing human-like characteristics for the purpose of socializing.
One of the results of this expansive influence of technology is an evolving way in how to think about and categorize technology companies. The parent company of the S&P indices has decided that the current business sector descriptions no longer do an adequate job in capturing the convergence of communication, media, and internet companies. Much of this has come from mergers, acquisitions, and bundling of services that cut across multiple sectors.
As such, effective September 28th of this year, the relatively insignificant Telecommunications Services sector of the S&P indices will be renamed the Communications Services sector. This is a big deal in that this new sector will now include industries dealing with the internet, gaming, and media. Sizable companies like Google, Facebook, Comcast, Disney, and Netflix will join AT&T and Verizon as significant weights in the new Communications sector.
Even before this reshuffling of industries, many technology-focused companies have resided in other sectors. Amazon is part of the Consumer Discretionary sector, alongside other retailers. The Financial sector includes a fast growing sub-sector called Fintech, companies which provide financial services primarily through electronic channels, such as PayPal, Fiserv, and Square. The Health Care sector has long been integrated with technology-centric business, including local software pioneer Cerner Corp and Intuitive Surgical, developer of the da Vinci surgical robot system.
From an investment perspective, the line between what was once considered a tech company and companies that rely heavily on advanced technology is becoming more blurred over time. Understanding how a company embraces technology has become a fundamental component of the investment case. No doubt, tech stocks in general have led the markets higher. Whether they remain the most attractive investment opportunity going forward is another discussion, but either way, their growing influence on our lives appears unabated.
Meritage Sr. Portfolio Manager, Len Mitchell, who serves as lead manager for the firm’s Growth Equity strategy, has written a series of pieces about current and future trends in technology. We will soon be posting these in several installments on our website. While lengthier than our usual investment commentary, we hope you will find it of interest.
As a preface to Len’s paper, we thought it would be helpful to provide a brief glossary for some of the more ubiquitous themes and concepts that are used today to capture technology platforms and trends.
- Artificial Intelligence (AI) / Machine Learning
AI has been around for a long time. At its base level, it is a technology that enables devices to act intelligently. More recent advancements have come from the development of neural networks – teaching computers to think and understand the same way humans do. Machine learning that has access to data applies AI in a way where it can learn by itself. This is typically done by processing feedback about being right or wrong from millions of simulations.
- Augmented Reality (AR)
Technology that imposes a computer generated image (elements of virtual reality) over the user’s real world environment. This concept was introduced to many in last year’s Pokémon Go craze where game images were combined with real-time camera views.
- Big Data
An enormous set of data that historically was too large and unwieldy to analyze by traditional data-processing tools. With the advancement of computing power able to process millions of simulations and other analytics, Big Data can now reveal patterns and relationships that help us analyze and predict human behavior. The practical applications are endless, including identifying diseases from previously undetectable patterns, inventory management and product design by predicting consumer behavior, and assessing athletic talent by tracking performance under every circumstance and condition.
A decentralized, digital system of recording transactions across multiple computers, providing a permanent, unalterable record. This was originally developed as a transparent accounting system for virtual currency transactions and is often associated with cryptocurrencies like Bitcoin and Ether, but its practical applications as a public ledger extend broadly to agreements or contracts that hold each party accountable to specific terms. The technology is now being used in applications for conventional banking, real estate, and insurance transactions.
The use of digital (computer-coded) technologies to change a business model and provide new revenue and value-producing opportunities. The acquisition of digital skills is becoming a prerequisite to individual and business success.
- Internet of Things (IoT)
A rapidly growing network of interconnected devices through the internet that are able to exchange and collect data using embedded sensors. Common examples of this are smart home appliances (thermostat, lighting systems, and refrigerators), cars, and wearable devices.
- Genomic Medicine
A personalized approach to medicine whereby treatment is tailored to an individual’s unique genetic makeup. Falling costs in genetic sequencing create wide open opportunity for pharmaceutical and technology companies.
The use of robots through computer engineering to perform human tasks with more and more complexity.
The use of telecommunication technologies to deliver virtual medical, health, and educational services. Wide ranging implications in terms of cost, accessing records remotely, and providing services to the underserved (those in remote locations or immobile populations).
We look forward to adding more substance to these concepts and how they come into play in our investment strategies in Len’s forthcoming articles.
James Klein, CFA, Principal & Sr. Portfolio Manager
Len Mitchell, CFA, Principal & Sr. Portfolio Manager