Investors brace yourself: pace of technological change much faster than you think

The following article appeared in the Australian Financial Review on October 18, 2017.

Amazon blew some minds this week with the announcement that it would hire 120,000 workers in the US to help it navigate the holiday season.

But while the scale of Amazon’s hiring is incredible – Amazon’s temporary worker pool would edge out Toowoomba as Australia’s 16th-largest city – that was not the real headline.

The real headline was that Amazon is not hiring any more temporary workers this holiday season than it did last year despite the company’s North American retail revenue increasing by 25 per cent thus far in 2017.

Amazon is coy about the drivers of its growth but it does not take a great deal of detective work to appreciate that Amazon’s secret sauce in scaling is in automation.

Amazon has more than 100,000 robots in warehouses around the world, according to The New York Times, performing tasks ranging from picking to packing items. For context, this is closing in on the 125,000 full-time workers the company has in its warehouses.

The company is hardly the first to put machinery and robotics to work to accelerate its business. But the pace of change is accelerating as we move further into the digital age.

Getting easier

The ratio of computing power relative to its cost continues to widen for the better while it’s getting easier for a growing pool of developers to harness that power.

Incidentally, on the same day that Amazon announced that it would hire 120,000 seasonal workers, it also announced a new partnership with Microsoft to establish “a new deep learning library, called Gluon, that allows developers of all skill levels to prototype, build, train and deploy sophisticated machine learning models for the cloud.”

Examples abound of the confluence of broader and faster connectivity, cheaper but stronger computing power, and machine-learning tools aimed at capitalising on both. My favourite “the future is now” example is the new Google Pixel Buds which, among other things, allow wearers to have real-time translations of 40 different languages. (As someone who has frequently been stuck on the wrong side of a language barrier, this tool sounds like borderline miraculous.)

It’s fun but also practical to consider the knock-on effects of such advances as they affect existing industries. A prime example is software that is distributed via the cloud.

Beyond the practical use case of having data and access that is untethered to a specific computer, the pace of cloud adoption has accelerated alongside increasing connectivity speeds, greater computing power, the falling cost of that power, the increasing range of device touch points, the increased range of integrations and the increasing value of real-time data.

Underestimated

The market isn’t oblivious to these trends but I suspect they’re underestimated.

For example, my hunch is that the market does not appreciate the potential cost savings cloud software companies will reap as hosting and distribution costs continue their long downward slide. (Note that Amazon Web Services prides itself on delivering value to customers and has cut its prices an incredible 62 times in its 11 years of existence.)

More to the upside, I think the market is underestimating the increasing size of addressable markets as product quality and utility increases sometimes, despite falling prices. For example, Xero reaching 246,000 subscribers in New Zealand as of the end of March suggests that its long-held market size estimate of 455,000 small businesses in the country understates the market opportunity.

Why? Xero’s ease of use, wide-ranging features and integrations, and low cost of getting started seem to have expanded its addressable market to include some unexpected sources including schools and property investors.

Investors probably shouldn’t get too carried away playing the role of armchair futurist. The future is coming at us fast, though, and investors who aren’t paying attention might be caught standing still.

 

Joe Magyer is the chief investment officer of Lakehouse Capital. He owns shares of Amazon and Alphabet. The Lakehouse Small Companies Fund owns shares of Xero. This article contains general investment advice only (under AFSL 400691). All of the commentary, statements of opinion and recommendations contain only general advice and have not taken into account your personal circumstances.

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