The world is racing toward universal connectivity. By 2020, the number of global internet users is projected to reach 4.1 billion, up 1.1 billion (37%) from 2015, and global Internet Protocol networks are expected to support 26.3 billion devices and connections by then—10 billion (61%) more than in 2015, according to Cisco Systems, Inc. With the soaring demand, five innovative areas have experienced tremendous growth that hasn’t yet shown signs of slowing. We refer to these five areas as SCODI.
Welcome to SCODI
- Software as a Service (SaaS)
- Online retail
- Digital payments
- Internet of Things (IoT)
From our perspective, these five areas represent potentially fruitful ground for uncovering compelling opportunities for investors with longer time horizons who are looking for companies that have strong technological innovation or that are benefiting from advances in the internet. While these companies often are found in the information technology (IT) sector, some are in other sectors, such as consumer discretionary and health care.
This article—the first in a three-part series—provides an overview of each area, including the main reasons it’s been enjoying robust growth. Future articles will provide a deeper dive into each of the five, with key reasons we believe the market may be underappreciating each area’s full growth potential.
SaaS: Using the cloud to help client companies work better
SaaS is a software-distribution model in which software vendors host cloud-based applications that they’ve made available by subscription to client companies through the internet. SaaS vendors provide a full suite of services for clients and maintain generally everything—including the servers, code, databases, security, and software updates for each application. Many companies—and even multiple business units within a company—have been shifting to SaaS solutions, which IT research firm Gartner, Inc., projects will grow 22.3% in 2018 alone.
In the SaaS model, subscribing companies of all sizes can gain significant tangible benefits:
- Savings of time and money. By simply signing up, subscribers obtain the software they need much more quickly than if they were to purchase and implement the programs themselves—and without the expense of building and maintaining their own systems.
- Potential boost in revenues. Many SaaS vendors are developing products to help their clients more effectively address market opportunities.
- Pay-as-you-go flexibility. A subscribing company can tailor the cloud services it uses over time, expanding as its business grows and easily adapting future services according to future needs.
- Seamless software upgrades. When SaaS vendors upgrade applications on the cloud, the upgraded products are immediately available to client companies, with no effort on their part.
For companies that sell SaaS solutions, the financial benefits extend beyond the initial sale. Because this business model is subscription-based, recurring payments from subscribers generate a reliable revenue stream for SaaS vendors, which can help buffer soft spots in future sales.
The cloud: A huge network of earthbound servers that enable us to use the internet
The cloud is a general term used to reference giant servers that can be pooled together to provide computing, storage, and networking services to millions of customers worldwide. Amazon Web Services (a division of Amazon.com, Inc.), Microsoft Corp., and Google Inc. currently are the three major cloud providers.
Many businesses are rapidly shifting to cloud-based services because of the benefits they offer, including:
- On-demand, broad network access. Cloud services are available anytime, wherever there is internet connectivity.
- Robust network security to help keep data safe. Data protection is a top priority for businesses, especially given the rising frequency of cyberattacks.
Gartner has estimated that the public cloud-services market will grow 21% worldwide in 2018 and at an 18% compounded annual growth rate from 2017 through 2021. Gartner also has projected that cloud adoption strategies will play a role in more than 50% of all IT-outsourcing deals through 2020. These numbers indicate tremendous growth potential.
Online retail: Growing faster than the retail industry overall
Online retail has expanded rapidly in the U.S. over the past few years. Recent data suggest that retail’s future growth will be primarily online: In February 2018, the National Retail Federation estimated that online retail would increase between 10.0% and 12.0% in 2018—nearly three times the 3.8% to 4.4% growth rate expected for total retail sales (excluding cars, gas stations, and restaurant sales).
E-commerce is a key beneficiary of the global shift toward connectivity, which has been enhanced by the proliferation of smartphones, tablets, and other mobile devices that facilitate both shopping and paying online. Even though online shopping has been expanding faster than the total retail industry, it still has a long runway for future growth: In the first quarter of 2018, online sales represented just 9.5% of U.S. retail sales overall, according to the Federal Reserve Bank of St. Louis.
The rising popularity of e-commerce has slowed traffic into brick-and-mortar stores, causing many traditional retailers to rethink their strategies. Some have adopted a two-pronged approach, increasing sales promotions within their stores while building out their websites to boost online sales. A number of retailers have been shutting down scores of physical stores as well; in early April, Business Insider reported that 26 traditional retailers have announced plans to close a combined total of more than 3,800 stores during 2018.
Digital payments: Benefiting from both high demand for connectivity and acceleration in online shopping
Motivated by their burgeoning engagement with mobile devices and desire to buy online, consumers have been transitioning from cash-based to digital transactions. A 2015 survey of U.S. and Canadian consumers by consulting firm Accenture plc found that 67% of respondents preferred paying with cash. In a second Accenture survey one year later, the percentage of respondents preferring cash had dropped to 60%, and only 56% said they’d likely still favor cash in 2020.
The growing proliferation of mobile devices and increased use of payment apps are expected to drive especially robust growth in mobile payments. According to Capgemini SE and BNP Paribas, annualized growth in mobile payments is projected to moderately exceed that of electronic payments from 2015 to 2019 (21.8% versus 17.6%, respectively).
As consumers continue to shift to shopping online, a necessary outcome will be that the percentage of digital payments will keep rising. Businesses that facilitate digital payments stand to benefit from this trend, especially those offering state-of-the-art payment methods for consumers and/or services for merchants that can streamline the payment process.
IoT: Creating opportunities by connecting people to things and things to things in new ways
IoT refers to the concept of enabling virtually any physical objects that have on-and-off switches (devices, machines, machine components, and anything else that can send and receive data) to communicate with people and/or with each other by connecting them through wired and wireless networks. These networks in turn push out huge amounts of data to computers for analysis.
Ultimately, IoT can transform the way we live and how businesses operate. Its effect on the economy could be huge. McKinsey Global Institute predicts that IoT—which it describes as “digitization of the physical world”—will have an economic impact of $4 trillion to $11 trillion by 2025.
While all kinds of things have been digitized already—wearable fitness monitors, home security systems, garage door openers, household appliances, automobiles, and industrial controls, among others—they may represent a fraction of items that will be connected going forward. Given that semiconductors are essential in order to digitize devices and systems, the trend toward IoT creates a tremendous opportunity for semiconductor companies in particular.
In the next article, we’ll take a deeper look at SaaS and cloud services, including reasons why the market might be underestimating their potential for growth.