Growing Lanes

by Justin Lowry, President & CIO, Global Beta Advisors, LLC

It is no secret that technology companies categorically experienced exponential growth over the past year, given the technological demand stemming from the COVID-19 global health pandemic. As many may have experienced or observed, technology has expanded into different industries, from the financial services industry to the food and restaurant industry. The ability for companies to generate greater efficiencies to deliver their product and services creates convenience for the consumer and generally better margins for their business. It may be difficult for investors to keep up with the emergence of new industries, which can lead to missed opportunities. It is a common occurrence for investors to look at a missed investment opportunity and wonder what could have been. There are several investors that are probably kicking themselves for not buying Amazon in 1999, Netflix in 2010, or Tesla in 2019. However, trying to time the market can be an extremely difficult task. Even the most sophisticated investors struggle making these determinations. Rather than agonize over when to get in or out of an investment, or model out what the total addressable market for a particular industry may be, we believe the best way for investors to align themselves with future winners is to look at industry trends. To provide context, the next graph charts out the growth in technology companies, as defined by FactSet’s Revere Business Industry Classifications (“RBICS”), over the past year:


Technology Revenue Growth

Source: FactSet Research systems, Dollar values in millions


electronic purchasing chart

Electronic Payment Processing Revenue Growth

Source: FactSet Research systems, Dollar values in millions


As you can see, revenues derived from technology-based industries, as defined by FactSet’s RBICS, grew by about 7.50% from roughly $4.6 trillion to approximately $5 trillion over the past year. It is quite remarkable growth, particularly when you consider that the U.S. economy endured a recession throughout most of that period. However, the basis for the recession – the global health pandemic – was a catalyst for technology’s growth. As consumers relied on virtual communication and at-home entertainment, many technology companies reaped the benefit of a socially distanced world.

However, simply observing technology’s growth on its surface does not provide the full picture. There were specific pockets within technology that really excelled, and perhaps, were acerated because of the global health pandemic. While these industries likely will not enjoy the growth rates achieved during the height of the pandemic, we believe consumers realized a level of convenience from the broad adoption of these products and services – originally out of necessity during the pandemic. An example of an industry that really picked up out of need during the pandemic is electronic payment platforms. During the early days of the pandemic, many were concerned about virus transmission through contact. Naturally, that dissuaded consumers from making purchases with cash and making purchases in person. Therefore, electronic modes of payment became more prevalent than ever. The previous chart shows the growth of the electronic payments industry over the past year.

As you can see, revenues derived from the electronic payment processing industry grew by about 23% from roughly $126 billion to approximately $157 billion over the past year. While the headline is the impressive growth rate for the industry at large, it is also notable that there is still room to grow as it is still only a $157 billion industry. As the demand for faster and more efficient payment platforms evolves from a safety hazard to a convenience factor, we believe this industry will continue to see strong growth, particularly among the companies in the industry that are growing their market share relative to their peers. We believe these companies hold untapped potential and better relative valuations as they are growing in an industry that is demonstrating strong growth. To provide context to the strength of this industry’s growth rate, the next chart pairs the growth of the electronic payment processing industry against technology.


Industry Growth in Context

Industry Growth in Context

Source: FactSet Research systems, Dollar values in millions


As you can see, the electronic payment processing industry’s growth far exceeded what was very strong growth by the technology sector. This is further evidence of how segmented parts of the market can become and how important it is to narrow down to each segment of the market and understand where the trends are emerging.

In summary, we believe it is important to analyze companies participating in specific industries that are demonstrating high growth levels, and who are growing their market share in those industries. It allows investors to gain exposure today to less commonly known companies, which we believe have the potential to evolve into blue chip companies that may provide everyday products and services in the future.


The views expressed are those of Global Beta Advisors, LLC as of 06/15/21 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice.

 

Distributor: Compass Distributors

Rising Stars: Rapidly emerging companies that indicate the next generation of growth stocks.

Factset Rising Stars Index is composed of stocks listed on the NYSE and Nasdaq that demonstrate market share expansion in the fastest growing technology industries.

FactSet Research Systems Inc. is a global provider of integrated financial information, analytical applications and services for the investment and corporate communities.

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