Identifying secular growth themes in technology is critical for successful investing in the sector. These technology waves create a tsunami in customer buying patterns and generate significant revenues and earnings. Companies that ride these waves can grow for many years and provide financial rewards for investors. The leaders of technology waves often garner a disproportionate share of the profits (Apple, Google), while second tier providers generally fall by the wayside (e.g. Yahoo, Palm, RIMM Playbook, Microsoft Zune).
The winners in a technology wave can evolve into cultural icons that influence national economies, global corporations and consumer buying patterns. Cycles typically last for less than a decade before the next innovation obsoletes the previous technology. For example, the mainframe, pioneered and dominated by IBM, was supplanted by Digital Equipment’s minicomputer. In the 1990s, the personal computer displaced the minicomputer and competitors Microsoft and Compaq emerged as the new stars, while Digital Equipment lost its leadership position. Cisco Systems, one of the best stocks of the 1990s (+94,000% in its first 10 years after its IPO), invented the router to connect PCs into networks. In the millennial decade, a new group of innovators like Google (+473% since IPO seven years ago) and Apple (+5,066% over the past 10 years) catalyzed and capitalized on the explosion of the internet and mobile computing.
The Next Technology Wave
Redwood believes that the next technology wave will be “Big Data”. The wave of Big Data is a natural byproduct of the shift from offline to online lifestyles, wherein billions of behaviors and transactions take place every day and are captured digitally by the parties involved. More recently, technology users have begun to demand access to these huge amounts of data anytime and anywhere to perform complex analysis that was not possible prior to the computing revolution. Businesses are identifying sales changes in real time, law enforcement professionals are detecting behavioral patterns and tracking criminals, and health care researchers are diagnosing diseases using genomics from remote locations. These activities involve aggregating and analyzing vast quantities of data in real-time. A recent McKinsey report featured the benefits of Big Data and provided various examples including prescriptions for retailers to increase operating margins by 60%, and strategies which could reduce US health care expenditures by 8%.
Winners in Big Data will provide solutions to address the intersection of storage, analytics, computing and mobility. Many technology companies currently address one or possibly two of these components, but few have developed a comprehensive suite of scalable solutions. The Redwood Investment Team continues to identified numerous companies that are likely to benefit from Big Data. Cloud computing, virtualization, wide area networking, and business analytics companies will all benefit from Big Data.