The digital transformation is the biggest, most investable tech trend in a generation. Don’t take my word for it: The evidence is overflowing in this quarter’s earnings reports … and this trend only getting started.
For example, The Walt Disney Company (NYSE: DIS, Rated “C-”) managers announced the company is shifting focus away from theme parks, cruises and summer blockbusters to “Disney+”, its new digital streaming service.
Disney gets an infinitely scalable digital business, while customers get more choices.
The change is already paying dividends. From a standing start only nine months ago, Disney+ has racked up 60.5 million paying customers. It is so popular that Disney Studios is releasing “Mulan”, a live action remake of its 1998 animated film, directly to the digital streamer next month.
For an additional fee of $29.99, subscribers will get to watch a first run, big budget summer blockbuster delivered directly to their living room, smartphone or tablet.
It’s a game-changer for the House of Mouse … and a chance to monetize its considerable entertainment assets at digital scale, like Netflix, Inc. (Nasdaq: NFLX, Rated “C+”).
And Disney’s recent success is only indicative of a far more over-arching trend in the economy.
The pandemic laid bare the importance of digital transformation, or DT. With workers and consumers holed up at home, virtualizing meetings, online shopping carts and entertainment kept the economy out of a certain depression.
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In April, Microsoft Corp. (Nasdaq: MSFT, Rated “B+”) CEO Satya Nadella noted that companies racing to get workers online quickly accounted for two years of DT in only two months. And business was so brisk in April at Amazon.com, Inc. (Nasdaq: AMZN, Rated “B”) the company announced it would hire 175,000 workers for its online store.
The lesson of the early days of the pandemic was that DT implemented well could easily scale up to meet massive demand. It could also admirably fill in a lot of real-world creature comforts like dating and even gym memberships.
Investors need to understand that these DT trends, while elevated by the pandemic, are not a one-time thing. And they are not going away. Most are only getting started because, above all else, they give consumers more of what they want, when they want it. And it doesn’t hurt that digital businesses can easily grow, or contract to just the right size.
This means steady sales growth for firms throughout the DT ecosystem.
That’s good news for DT system builders like Accenture plc (NYSE: ACN, Rated “B”) and Booz Allen Hamilton Holding Corp. (NYSE: BAH, Rated “B+”). Despite the pandemic, these consulting firms posted better-than-expected sales growth, while guiding forecasts higher for the remainder of the year.
Architects build on foundations. Together, Amazon Web Services (AWS), Microsoft Azure and Google Cloud, a subsidiary of Alphabet, Inc. (Nasdaq: GOOGL, Rated “B-”) have a stranglehold cloud computing infrastructure, the $100 billion cornerstone of DT. During the last quarter, sales at the cloud divisions grew 29%, 49% and 42%, respectively. Shares are up 68%, 31% and 11%, respectively, in 2020.
Saleforce.com, Inc. (NYSE: CRM, Rated “C-”) and ServiceNow, Inc. (NYSE: NOW, Rated “B-”) make software platforms that sit directly on top of cloud infrastructure. Salesforce owns the best-in-class customer relationship management software platform, with 18.4% of the $40 billion market, while ServiceNow’s information technology platform has been the roach motel of DT platforms. Enterprise customers check in, and they almost never leave. Shares of CRM are up 17% this year and NOW shares are up 50%.
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A bunch of software-as-a-service add-ons fulfil selected enterprise needs. Zoom Video Communications, Inc. (Nasdaq: ZM, Rated “C”) builds an easy to use videoconferencing platform that salespeople, families and friends have flocked to. The DocuSign, Inc. (Nasdaq: DOCU, Rated “D”) platform makes it safe to legally sign virtual documents. And next-generation firewalls from Zscaler, Inc. (Nasdaq: ZS, Rated “D”) allow firms to quickly secure laptops and mobile phones from pesky hackers.
The Trade Desk, Inc. (Nasdaq: TTD, Rated “C”) platform is the fastest way to buy and sell digital advertising on every site not owned by Facebook, Inc. (Nasdaq: FB, Rated “B-”) and Google. Jack Henry & Associates, Inc. (Nasdaq: JKHY, Rated “B”) has a suite of digital tools that allow regional banks and credit unions to provide branded online banking. And Schrödinger, Inc. (Nasdaq: SDGR, Rated “D+”), co-founded by Microsoft founder Bill Gates, is building a digital simulation platform to help pharmaceutical companies find new drugs faster and cheaper. All these businesses continued to ramp sales last quarter.
On the other end of the spectrum are consumer-facing businesses. They’re shining examples of how the internet has transformed entrainment and community. Despite all the controversy, Facebook, with its Instagram and WhatsApp platforms, virtualized the public square. The products now reach 3.1 billion unique users. Sales during last quarter grew to $18.3 billion, up 10% year-over-year.
Now, Peloton Interactive, Inc. (Nasdaq: PTON, Unrated) and Match Group, Inc. (Nasdaq: MTCH, Unrated) are trying to build similar businesses around spiffy connected exercise bikes and online dating. Both businesses continued to grow sales at a ferocious pace this quarter, rising 66% to $525 million and 12%, to $575 million, respectively.
Believe it or not, that’s where Disney is headed with its Disney+ streaming service. The company is building a unique digital franchise around its catalogue of children’s animated features and its Marvel and Star Wars brands. This business has the potential to grow to 200 million subscribers, with plenty of pricing power.
It’s an investment story that is only getting started. Don’t ignore it.
Best wishes,
Jon D. Markman
