Beyond Amazon: The companies leading the digital economy’s next wave of innovationThe Evolving Economy 12 June 2018
Beyond Amazon: The companies leading the digital economy’s next wave of innovation
AXA IM Framlington Equities Fund Manager, Jeremy Gleeson takes a look at the next generation of technology innovators
Amazon’s latest set of corporate results drove much market cheer as the technology giant announced a set of numbers significantly ahead of expectations.
During the first three months of 2018, sales at the $760bn online retailer had not only increased to $51bn but profits had more than doubled to $1.6bn - up from $724m in the same period last year.(1)
Many successful internet firms have been in business for years - in Amazon’s case, more than 20 - but perhaps surprisingly just 9% of global retail sales actually take place online. (2)
As such there is plenty of room for further, and potentially compelling, growth over the coming decades as the digital economy expands.
And while mega-caps are an important part of the universe, we believe the small and mid-cap arena also has a role to play, with a wealth of innovation spread across the two sectors. Additionally the sector can also be a hotbed of M&A activity, and so far this year, markets have already witnessed a massive $1.4tn deal boom. (3)
Notably early May saw customer relationship management technology provider, Salesforce, acquire Mulesoft at a 36% premium, which sells a suite of integration software that allows companies to connect applications, data and devices via its Anypoint Platform™. (4) (5)
But aside from the M&A factor, in our view the prospects for companies associated with the digital economy remain robust given there is no shortage of growth drivers. The continued expansion of, among many others, online commerce, digital media, electronic payments and digital transformations, all have the potential to help the sector flourish further.
For example, Zendesk provides a cloud-based customer service platform geared toward small and medium sized business, which enables incident response ticketing, customer self-service and general customer support functionality. In its 2018 first quarter results, it reported a year-on-year revenue increase of 38%. (6)
The firm operates across a vast market and has a number of opportunities for both cross-selling and upselling. Last August it released a new product, AnswerBot, which takes them into the field of conversational artificial intelligence and could potentially help the firm grow and expand further.
Application performance management (APM) group New Relic appears to be presently disrupting the cloud-based market. Essentially its products allow users to monitor software and infrastructure performance and measure user activities across desktop and mobile devices. While APM remains the company’s core market, it is also expanding into analytics, infrastructure and server monitoring, increasing its total addressable customer base.
The San Francisco firm has outpaced markets’ expectations, reporting fourth quarter revenue of $98.4m, a 34% jump over the same period in 2017, and is planning further investments to potentially increase its overall market opportunities. (7)
Elsewhere Square provides software and hardware to help businesses with sales, inventory, reporting and analytics. The $19bn company also offers financial and marketing services while its payment and business solutions have enabled significant share gains and expanded the addressable market of potential merchants. As might be expected, the secular trend of increasing electronic payments has served as a major tailwind for the group and in its 2018 first quarter update, it reported that year-on-year, its total net revenue had expanded by a sizeable 45%.(8)
1 Amazon (26 April 2018)
2 Citi Research, Citi GPS “Technology at work v3.0”, August 2017
3 Bloomberg (4 May 2018)
4 Mulesoft (2 May 2018)
5 Mulesoft (20 March 2018)
6 Zendesk (1 May 2018)
7 New Relic (8 May 2018)
8 Square (Q1 2018 Shareholder Letter)
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