Some investors believe the technology sector is still overvalued and is due for a lengthy correction.
But Jason Donville and Jesse Gamble of Donville Kent Asset Management make a convincing case investing in technology stocks is like holding a beach ball tightly under water, and that the sector is “on the cusp of an exponential ascent and that beachball definitely will not be held down for very long.”
by Jason Donville and Jesse Gamble, excerpts from the latest ROE Reporter
Technology stocks conquered other sectors last year, which has naturally prompted some investors to ponder:
“Is this tech trade over? Is it time to pounce on the next big things?”
The actual technology sector is just beginning a massive growth phase that every investor should explore.
Over the last few months, consolidation has been a major trend within the technology sector, meaning many technology stocks have traded sideways or traded down.
We have seen many market pundits declaring this the end of the technology trade, urging investors to clamour for value stocks.
From our perspective, investing in the technology sector right now is the equivalent of holding a beachball tightly underwater.
Years from now, we will look back at this time and reflect on how this current shift radically changed civilization forever in ways that we cannot even comprehend at this time.
The sector is on the cusp of an exponential ascent and that beachball definitely will not be held down for very long.
The inflection point at which exponential growth segues from mimicking linear growth to demonstrating exponential growth is referred to the “knee” of the curve.
We may not fully appreciate this right now, but the entire world is on the brink of a paradigm shift. The world keeps shifting to a more knowledge-based economy.
Operating costs are decreasing as the infrastructure continues developing, propelling innovation as a whole to rapidly accelerating.
We maintain active dialogue with many management teams. Recently, we have been hopping on more calls than ever with CEOs of private and public companies, particularly within the technology sector.
If our day-to-day was made into a movie, it would be a fast-motion montage of all these CEOs repeatedly sharing the same update that they’re seeing the pace of growth accelerate ever faster.
Innovation victory favours the swift and these moving pieces have fallen into place for the absolutely perfect storm of a decade (likely longer) of dramatically outsized growth.
Why is this happening now?
When we refer to technology, we are referring to the process by which an organization transforms labor, capital, materials and information into products and services of greater value.
Then that means innovation is a change in one of these technologies. In the past, successfully executing certain technologies would not have been feasible.
However, due to the recent ramp-up in technological innovation, we have opened the doors to the next industrial revolution.
Notably, the following four factors have brought this to fruition:
The sheer speed of the internet and computing power has increased by leaps and bounds.
While most of us are incredibly reliant on internet and technology as a whole, approximately half of the global population still lacks access to internet connectivity.
However, major improvements continue being made and innovations such as low earth orbit satellites and rural fibre rollouts keep boosting global access to internet connectivity.
At this current pace of innovation and growth, the rest of the world will be coming online in the very near future.
Fifty billion new devices are estimated to come online by 2030, dramatically increasing the addressable market for e-commerce, fintech, etc. and therefore increasing growth and profitability.
Ultimately, most business models can only succeed if the cost to the end user is affordable.
Several years ago, the cost of storing terabytes of data in the cloud or just streaming a video was prohibitive, hence why driving to the nearest Blockbuster to peruse its library of rental videos was a weekly ritual.
Since then, the cost of storing and sending data has plummeted to the point where businesses can now fully operate in the cloud.
People who were reluctant to adopt technology beyond the bare necessities had no choice but to embrace banking online, ordering groceries online, scheduling virtual doctor’s appointments or just participating in a video conference and keeping in touch with loved ones via FaceTime.
Why does this matter?
Exponential growth, which we usually refer to as compound growth, is very deceptive.
Compounders as stocks are routinely undervalued because most investors only look ahead to the next 1-2 years.
When examined over such a short period of time, exponential growth looks like a straight line.
For example, consider the example of Constellation Software (TSX:CSU) below and how a randomly selected 2-year period (2016-2018) implies good performance but still fairly linear performance during the short-term.
Generally speaking, most people view their investments through this narrow window.
Of course, short-term gains are important but if you are seeking to generate significant returns, you must hunt for opportunities with exponential growth.
And that’s where Donville Kent comes in; it is our sole mission to uncover investments that will increase in value over the short-term while also having the capacity to compound into life-changing returns.
This new technology paradigm is where the next exponential returns are going to come from.
The faster a market grows, the easier it is for a business to grow alongside. As the old adage says, “If you want to catch fish, fish where the fish are.
Where is this happening?
Being on the leading edge of innovation and focusing on exponential growth trends is where the most growth and greatest returns will come from in the decade ahead.
Please see below for rapidly growing small cap technology companies within the following verticals.
- Digital Asset Management
- Virtual Reality
- Healthcare Tech
- Green Energy
We have entered an era where companies literally cannot operate without their software. These business models are superior to almost any other business model out there.
They are asset-light, sticky, scalable and high margin. If you want to outperform and get outsized returns, prioritize investing in markets that are growing exponentially.
When it comes to digital innovation, victory goes to the swift. Here at DKAM we are looking forward to finding, researching and ultimately investing in the best innovations over the next decade.
Big companies start as small companies and we will continue to focus on finding the next great investments in the small cap space.
J.P. Donville & Jesse Gamble
All estimates, projections, and calculations have been generated by DKAM. This does not constitute advice for personal investments but rather a breakdown of how Donville Kent approaches stock analysis.