Tech giants represent the tip of the iceberg when it comes to digital connectivity plays today. With digital technology taking the driving seat, it is not only the traditional IT sector that is benefiting from trends in digitalisation and hyperconnectivity. Investors should look beyond the FAANGs (Facebook, Apple, Amazon, Netflix, and Alphabet’s Google) for companies across a range of sectors that are poised to profit in the new hyperconnected world in which customer convenience is key.
As companies in all industries evolve their business practices, they’re increasingly operating digitally regardless of their ostensible sector. Take Starbucks, for example. What’s currently driving the global coffee chain’s growth is its mobile app, which allows its customers to order and pay for their drinks before they arrive in a store – and earn loyalty points as they do so. It’s a perfect example of how physical retail presences now combine with online operations to create convenience for the customer.
This sort of hybrid or ‘omni-channel’ approach is fast becoming the norm among retailers. Companies who lack an online presence are struggling to keep up in an environment in which customers want the freedom to have goods delivered or to pick them up in store – and to drop them off somewhere convenient if they aren’t suitable.
And it’s not just retailers. Priceline is a travel agency that sits in the consumer sector. But it’s also an online operation that exploits technology to the full. The trend towards hyperconnectivity is benefiting it significantly, as it can offer its customers the widest range of hotels and act as a one-stop shop for a broad range of travel-related services.
Hotels are also thriving in the hyperconnected world. Companies such as Intercontinental Hotels benefit from websites such as Booking.com (owned by Priceline), but are also using mobile apps to allow people to check in and access codes that act as their room keys. That creates a huge amount of convenience for regular travellers, who can go straight to their rooms and relax. And it also creates investment opportunities in unexpected places. An example is Sweden’s Assa Abloy. This lock-maker is seeing rapid earnings growth from its entrance systems as its hotel clients, as well as corporates and governments, move to digitalisation.
There are also clear winners in the financial sector as demonstrated by the booming fintech industry. As the e-commerce market continues to grow apace, Visa and MasterCard, with their online networks, worldwide traditional merchant relationships and advanced technologies and security systems, will continue to be prime beneficiaries.
How should investors react to an increasingly digital environment?
While all eyes are on FAANG stocks, investors would do well to search for businesses that are exploiting the digital environment to the full – regardless of the sector in which they operate. Companies that can harness these trends are the ones that will be best placed to gain market share at the expense of slower-moving competitors. And in the meantime, the early adopters in other sectors may well be more attractively valued than the tech giants that are hogging the headlines.
Mark Phelps is portfolio manager of the AB Concentrated Growth Portfolio