The purpose of this weekly is to sharpen my thinking by sharing thoughts about industries and companies that fit into powerful long-term investment themes. It is also a place to share insights into decision making, takeaways from the past week, and random thoughts that arise. Thank you for reading this piece! Feedback is welcomed.

This week:
➢ Technology Ubiquity – A Challenge and Opportunity
➢ The Mindset for Technology Ubiquity

Technology Ubiquity – Both a Challenge and Opportunity for Investors and Allocators

Since the first PC was shipped roughly 40 years ago, technology has progressively become more and more prevalent in our daily lives. The term ubiquitous means something that is found everywhere or is very common. It also is used to describe things that are so common in our environment that they become almost invisible due to their prevalence.
There is a whole generation of adults that know only technology ubiquity. It is hard to remember a time when we didn’t have smartphones, seamless delivery of goods and food, and streaming services. Once something becomes ubiquitous, innovation

is then built on top of or replaces what exists. I have discussed the PC Era in prior posts and that enabled the Internet Era by laying the infrastructure in place for the next revolution.
It is safe to say that technology is here to stay. It is also safe to say that the share of spending in the economy will continue to shift more toward technology over the next 10 years. This will continue the existing trend of prosperity for technology companies.

This trend presents a challenge for investors and allocators as it has resulted in tremendous long-term value creation by a handful of technology and internet-based
companies. These companies now comprise an outsized percentage of indices and have a massive impact on overall market returns.

The companies that comprise Big Tech are well positioned to continue to grow and be a very important part of the global economy. In addition to having a strong connection with their customers, they also have mountains of annual cash flow plus a stockpile of cash on their balance sheets. Historically, when companies got very large, they were ripe for being disrupted. These companies were built by brash entrepreneurs and had cultures that experimented and re-invested large sums of money to drive further innovation. This is one of the paradigm shifts that has evolved as technology has become ubiquitous.

So, if one agrees that these companies are outsized and poised for further growth, this presents challenges for investors and allocators.
For those investing in traditional style boxes, the Russell 1000 Growth is most often used as a benchmark. It currently has close to 50% of its weight in 7 stocks.
Russell 1000 Growth Index ETF

Ticker	Name	Sector	Asset Class	Weight (%)
MSFT	MICROSOFT CORP	Information Technology	Equity	11.87
AAPL	APPLE INC	Information Technology	Equity	11.63
AMZN	AMAZON COM INC	Consumer Discretionary	Equity	5.65
NVDA	NVIDIA CORP	Information Technology	Equity	4.94
GOOGL	ALPHABET INC CLASS A	Communication	Equity	3.51
META	META PLATFORMS INC CLASS A	Communication	Equity	3.33
GOOG	ALPHABET INC CLASS C	Communication	Equity	3.00
TSLA	TESLA INC	Consumer Discretionary	Equity	2.85
				46.79

 

The most used benchmark for the broader market is the S&P 500. It currently has 27% of its weight in the same 7 stocks.
S&P 500 ETF

Ticker	Name	Sector	Asset Class	Weight (%)
MSFT	MICROSOFT CORP	Information Technology	Equity	6.93
AAPL	APPLE INC	Information Technology	Equity	6.74
AMZN	AMAZON COM INC	Consumer Discretionary	Equity	3.33
NVDA	NVIDIA CORP	Information Technology	Equity	3.00
GOOGL	ALPHABET INC CLASS A	Communication	Equity	2.04
META	META PLATFORMS INC CLASS A	Communication	Equity	1.95
GOOG	ALPHABET INC CLASS C	Communication	Equity	1.74
TSLA	TESLA INC	Consumer Discretionary	Equity	1.67
				27.41

 

Source: iShares
In either case, this presents a problem of sorts for investors and allocators. These 7 companies will have a massive impact on the returns of the market. They also will present issues for managers trying to outperform these benchmarks. I believe that some of the correct questions to ask are:

• How exposed do I want to be in these companies / stocks?
• Where will I seek to generate returns / alpha outside of these companies and their stocks?
• Does this change the way that market returns will be produced annually? What about long-term?

I have thoughts and questions about these, and other challenges created by this market dynamic presents and will share those in future posts.

While technology has become more and more a part of our lives, so has the share of money flowing to these companies that enable our technological lives.

As such, these Big Tech companies have very sizeable revenue bases, many driven by recurring revenue, strong margins and cash flow, a great history of reinvestment and fortress balance sheets. They all have the elements for long-term value creation, on top of the long-term value that they have created over the last two decades (or more).
I have some strong views on these challenges and plan to write more about them. I also would love to hear from anyone that wants to discuss it further. My contact information is on our website, which is included below.

Technology ubiquity also presents opportunities. First, I would like to stop and observe that our lives have improved with technology ubiquity. We can get an Uber on demand, get groceries delivered from an order on an app, we can move about freely and stay connected. The list goes on.

As for investment opportunities, there will be plenty. The infrastructure that was put in place during the PC Era and the Internet Era has paved the way for the Data and AI Era. As I have discussed in prior posts, AI is an advancement that needed the Internet Era advancement and is a significant addition to the landscape.

Many companies that will drive future innovation have been created recently or are being created right now. Plus, the companies that comprise Big Tech are investing large sums to compete and drive AI forward.

One thing that presents a slight departure from prior eras is that in this era, companies that are data intensive in their value to customers have a head start. Two groups of companies come to mind immediately, SaaS companies and direct to consumer brands. These companies have built their value proposition to customers on the cloud or on the web and are in a good position to capitalize on what AI has to offer. They need to execute and stave off inevitable new competition as a result of the innovation at foot, but they are in good position.

One other thing that may be a departure from prior eras and cycles is that there may be less companies that participate in the prosperity that we will see from AI and other advances. The companies that are well positioned and execute well should garner more of the spoils. This appears to have been the case in the later portion of the Internet Era (see Big Tech) and is likely to persist due to technology ubiquity. I will talk more about this in future posts.

Mindset for Tech Ubiquity

One of the fascinating things about transformative change is that it comes with many points of view. I have shared a story in prior posts that I like to tell about how institutional investors didn’t want to hear about our recommendations on Microsoft and Dell because they only wanted to own Walmart. Again, all three were great investments by most standards but the technology companies compounded at a much higher rate, both in their revenue growth and stock returns.

We find ourselves in a place where:

• Big Tech dominates revenue, cash flow, and public equity markets.
•  Massive change is coming in the form of AI and other advances.

In the PC and Internet Eras, there was optimism and there were also the deniers, who were usually the companies or people that had a vested interest in keeping things the same. This is classic behavior, and it can make it hard to sort through what to believe about the future. Like it or not, we are all future prediction machines, constantly trying to guess what the future holds.
I go back to a few things that I believe to be the case and keep a view of the horizon:

• Technology is ubiquitous and here to stay.
• Technology will continue to be more and more prevalent in our daily lives.
• Technology companies (and Communications) will garner the most equity value in the marketplace, both for public and private.
• The swings in public markets will continue to be high, because technology plays such a large role in the valuation of the markets.

There will be people who disagree with these observations, but these seem very logical given what has happened to get to where we are today. This requires a longer term mindset, and one where it makes sense to look around and try and witness the change and prepare and run alongside it, rather than deny it.

My story

I am an investor and entrepreneur, having started two investment companies. I am the Founder and CIO of Arrowside Capital (http://www.arrowside.com), based in Boston, MA. I have more than 30 years of experience in the investment business, investing in companies geared toward innovation and growth. The blog is named The Zen Innovation Investor because I believe it is so important to remain calm and focused during the rapid pace of change in the world today. I am keeping a view of the long term while also keeping abreast of developments in the world of innovative companies. I view this as a place to sharpen my thinking and provide some insights that are thought provoking.

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