Year Ahead 2022: Invest in the ABCs of tech
After years of talk about the FAANG stocks, we think tech investors in 2022 and beyond will need to learn a new language: the “ABCs of technology.” We expect growth in Artificial intelligence, Big data, and Cybersecurity to outpace the broader tech sector, and we think investors should look to the small- and midcap tech space — as well as private markets — to capture the opportunities they present.
The ABCs of technology: AI, big data, cybersecurity
To tap into the “ABCs of tech” trends, we think investors need to look beyond the
mega-caps, and into smalland midcap companies. As well as providing exposure to key tech disruption themes, we think small- and mid-cap tech stocks offer faster earnings growth than their larger peers, lower regulatory or tax risks, and greater opportunity to benefit from consolidation.
We expect the combined revenues of the three segments to grow from USD 386 billion in 2020 to USD 625 billion in 2025. AI revenues should rise the fastest by almost 20% a year, with big data and cybersecurity growing at 8–10% a year but with greater potential for margin expansion, in our view. Overall, we expect companies exposed to our “ABCs of tech” theme to deliver 16% earnings per share (EPS) growth per year.
Artificial intelligence. AI is already widely used in areas such as navigation, pricing, advertising, facial recognition, and translation. In the years to come, we believe companies will increasingly turn to AI to improve customer experiences, reduce the cost of providing products and services, and develop new business lines. We expect the market for AI services and hardware to grow 20% a year to reach USD 90 billion by 2025, and it could even surprise to the upside if improvements in computing power, research and development, and machine learning and deep learning capabilities exceed our expectations.
Big data. It has become commonplace to say that data is the new oil. Indeed, we are surrounded by this digital commodity:
We expect the global data universe to expand more than tenfold from 2020 to 2030, reaching 660 zettabytes— equivalent to each person on the planet having 610 iPhones (128 GB). But just like oil, data needs to be refined before it can be put to use to automate business processes, boost efficiencies, or improve the quality of strategic decision-making.
Data travels through six distinct stages during its life: creation, transmission, storage, processing, consumption, and monetization. We focus on companies that touch on all the steps within the digital data life cycle, and expect the big data market to grow 8% a year from 2020 to 2025. Our estimates may prove conservative if big data adoption in emerging markets is greater than we expect.
Cybersecurity. The number of connected devices is growing rapidly, but at the same time nearly 330 million people in 10 countries experienced cybercrime in the last 12 months, according to the 2021 Norton Cyber Safety Insights Report.
Meanwhile, at the enterprise level, shifting to cloud computing has cut company costs significantly, but it has increased the potential impact of an online attack.
We expect the cybersecurity industry to grow by an average of 10% during 2020–25 thanks to steadily higher enterprise IT spending and the stronger adoption of cloud security. Cybersecurity is also one of the most defensive segments within IT. Reflecting its importance, enterprise spending on cybersecurity has grown by high-single-digit rates in recent years, whereas broader IT spending has grown only by low- to mid-single-digit rates.
5G. We believe the rollout of 5G technology, which is 20 times faster and 90% lower in latency than 4G, will bolster the impact of the ABC technologies, enabling various applications that were not feasible before. These include fixed wireless access, autonomous driving, immersive augmented and virtual reality (AR/VR), telesurgery, massive Industrial Internet of Things, data-driven agritech, and highly connected smart cities.
We see opportunity in 5G enablers and platform beneficiaries, and estimate a midteens earnings growth potential over three years.
Beyond the mega-caps
Investing in the tech mega-caps that dominate major equity benchmarks (roughly 20% of the MSCI ACWI) affords investors some exposure to the ABCs of technology. These incumbents have their own strategies around disruptive technologies that could strengthen their position in these and related fields, like cloud computing. We have continued to see strength in tech mega-cap names, but entering 2022, valuations are around 30x forward P/E with low-teens expected earnings growth next year, and larger tech firms remain exposed to regulatory risks.
History also shows that the largest companies tend to change over time, and incumbents don’t last forever. As such, we believe it is important for investors to also focus on newer, more agile, faster-growing companies to gain exposure to new trends and technological innovations. This can be done in both public and private markets:
Small- and mid-cap tech. We see three key reasons to focus on small- and mid-cap tech stocks in the years ahead. First, faster earnings growth: Consensus expects high-double-digit rates for smaller tech firms versus low- to mid-double-digits for larger firms. Second, lower regulatory and tax risks: Smaller firms are likely to be less subject to government scrutiny than mega-caps. Third, consolidation: Smaller tech companies may benefit from mergers as maturing mega-caps attempt to acquire growth.
Private equity. Investors can also gain exposure to early-stage growth companies not yet available in public markets through private equity. According to PitchBook, some 437,000 tech companies globally are privately held, compared with just 8,100 that are listed on public exchanges. Currently, private equity investors are particularly active in sectors such as healthtech, fintech, digital subscriptions, and those that benefit from the shift to more sustainable economies.
Digital assets and fintech
Digital assets have been one of the hottest market segments in recent years. While many have focused on price fluctuations of crypto coins, we see the most significant long-term value creation potential in companies that can benefit from applications based on the underlying distributed ledger technology (DLT).
These technologies offer the potential for greater efficiency, security, and transparency, and we estimate that the adoption of such technology could boost global GDP by more than USD 1 trillion over the next decade, representing a significant growth opportunity for the companies that provide services for DLT-based ecosystems and for enablers and platform operators.
More broadly, while technology has always been a key differentiator in the financial services industry, the pandemic triggered a dramatic shift toward contactless, mobile payments, and e-commerce, while the need for cost savings and competition from startups are forcing incumbent financials to also launch fintech services.
A combination of these trends means we expect fintech revenues to grow from USD 225 billion in 2020 to USD 750 billion in 2030, implying an average annual growth rate around three times faster than the broader financials sector’s revenue growth rate. With double-digit earnings growth over the next decade, we expect fintech to be one of the fastestgrowing industries globally.