AXA’s Gleeson: Thinking Digitalisation? Don't Forget Gaming

The changes brought about by the pandemic have only just begun, if AXA Framlington fund manager Jeremy Gleeson is to be believed

Ollie Smith 18 March, 2022 | 11:50AM
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The coronavirus pandemic has rapidly accelerated the digitalisation of the global economy.

Even with restrictions eased, digitally-driven industries continue to flourish and provide attractive, long-term growth opportunities during a period of short-term volatility for the wider technology sector.

We have identified four key areas within the digital economy we think are set to contribute to long-term growth for a global technology portfolio across the entire value chain.

D is For Discovery

Discovery is all about how consumers search for and find products and services, and how businesses attract new customers.

Covid-19 resulted in an e-commerce boom as lockdowns drove a greater mass of shoppers online than ever before. That created greater opportunities for online advertising, and for companies operating in the social media space.

Among the companies helping brands to harness social media and the internet more broadly is Hubspot, which offers tools for businesses to gather and analyse data and convert leads into sales. Its latest earnings figures showed a 47% year-on-year jump in revenue in the third quarter of 2021, as small- and medium-sized businesses increasingly scaled up their digital operations.

Sprinklr is another company helping businesses manage their social media channels. It saw its own Q3 revenue jump by 32% year-on-year. The bulk of that expansion is made up of subscription growth – and such recurring revenue streams can be highly attractive for investors seeking some degree of potential future earnings’ visibility.

D is Also For Dispatch

Another long-term theme is the shift from physical cash to electronic payments. Clearly, the adoption of e-commerce has already driven the requirement for digital payment networks, but card-based or mobile-wallet based transactions, such as Apple Pay, are becoming the preferred option for all sizes of expenditure in physical shops. That’s been broadly been positive for the providers of digital payment solutions.

While we expect revenues to grow as shoppers continue to return to the high street, online sales are likely to remain strong.

Some debit and credit card providers, such as Visa, are unlikely to have benefited fully yet from the reopening of economies after lockdown. Visa is expected to receive a boost from increased international travel when new restrictions ease and its long-term growth drivers normalise.

Meanwhile, fintech specialist Fidelity National Information Systems is an innovative solutions provider favourably placed to take advantage of growing demand for international digital banking capabilities. Its HORIZON platform offers a powerful and seamless service across all major browsers.

Complementing this is Global Payments Inc., a fellow fintech currently enjoying various partnerships with high-visibility and technically astute multinational clients. It facilitates cryptocurrency processing and has an ambitious growth strategy, as seen by its recent acquisition of commercial payments company MineralTree.

On The Defensive

Cybersecurity is increasingly under the spotlight as more people work from home and more transactions are conducted online. Cyber security company Tenable, for instance, reported a 23% rise in Q3 revenue, citing “unprecedented demand” as companies move to the cloud.

Darktrace, the UK-based cyber security business, also performed strongly in 2021 following its IPO early in the year. Palo Alto Networks, conversely, is a more established cybersecurity provider. With its comprehensive suite of products, it is well placed to benefit from the inexorable shift to remote – or at least hybrid – working.

Finally, Rapid7 is liked by analysts due in part to the global rise in demand for its penetration testing services, a market experiencing rapid change as businesses identify their weaknesses and prevent costly hacks.

Data And Enablers

Together, these two refer to companies providing technologies or services that help customers adopt a digital “ethos”.

IT services companies like Endava and Globant have enjoyed good growth as businesses undergoing digital transformation seek help from experts to hone their digital strategy. 

We have also seen good potential investment opportunities in companies exposed to the digitalisation of the back office, such as Workday and Paylocity, which handle payroll and human resources management. In November, Workday announced a 20% rise in third-quarter revenue year-on-year, while Paylocity reported a 34% jump in revenue for its fiscal first quarter.

Companies that were traditionally offline also need expertise from third-party specialists to compete in the new environment with ‘digital natives’; that is, companies originally designed to thrive on the web.

New Relic is a cloud-based platform that allows companies to collect, store and analyse data in real-time. This helps firms to better understand a customer’s journey on their website and build on that learning to potentially encourage more people to make a purchase. For many companies this type of service has gone from being ‘nice to have’ to a ‘must have’.

Similarly Activision Blizzard, one of the pioneers of massively multiplayer online role-playing games, has performed well on the back of Microsoft’s acquisition at a 46% premium to the prevailing market place.

This evidences the growing acknowledgement that gaming and leisure is not only an exciting long-term growth opportunity accelerated by the pandemic, but also reflects a continuing and compelling shift in the popularity of online gaming. The trend for digital downloads, subscriptions and micro-transactions can provide a steadier stream of revenue than traditional console hardware releases – with less of the potential supply chain backlogs.

Jeremy Gleeson is manager of AXA Framlington’s global technology fund

The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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Ollie Smith

Ollie Smith  is editor of Morningstar UK

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