As we enter the final quarter of the calendar year 2022, it has been a year of considerable global changes. Interest rates to tackle inflation, labour shortages, supply chain challenges, the war, and persisting lockdowns in China have generated significant volatility in the markets.
We cannot see into the future, but data points suggest that markets will be prone to continued buffeting from these macro headwinds in the near term. As our investors will know, growth investing often takes the first hit during market downturns and heightened volatility. However, we continue to remain disciplined and focused in selecting well-managed, game-changing, market-leading companies and remain patient over a long-term investment horizon.
Our investment approach is unaffected despite the challenging market and prevailing volatility because ultimately, they do not reflect the long-term fundamentals of our portfolio companies and asset choices. Notably, investing in robust businesses that will weather the current storm and emerge on the other side will be a testament to their quality. As sentiment and markets scrutinise profitability, shrewd capital allocation, and cost controls, the best companies will emerge even more robust – more streamlined, lean, and efficient.
One well-known example is the shift to cloud services, i.e. storage and computing. The adoption of cloud storage has incrementally increased over the last decade, reaching 60% in 2022 compared with 30% in 2015. Estimates forecast enterprise spending on the public cloud alone to grow at a compounded annual growth rate of 20% in just the next three years to 2025, with spending leaping 70%, advancing the addressable market size to $917 billion.
Source: Gartner, https://www.gartner.com/en/newsroom/press-releases/2022-02-09-gartner-says-more-than-half-of-enterprise-it-spending
As more applications come online and the day-to-day prevalence and quality of digital content increases, the upward trend of cloud services infrastructure facilitating them will also need to grow and mature. Consider the vast range and growth of content broadcasters, the evolution of content depth and richness, or the continued development of AI Internet of Things applications and automation. Areas of structural growth such as cloud maintain durable runways on a long-term timeline and will be able to navigate short-term macroeconomic headwinds.
Shifts are also taking place within entertainment. Gaming is a terrific example. A ubiquitous pastime in an already rapidly changing industry before the pandemic, it subsequently received a rocket blast as people sought ways to entertain themselves and maintain connections with others in the virtual world. Whilst the pandemic helped generate a momentary period of uplift for the gaming industry, it has also aided awareness across all age groups and spurred investment into boosting the gaming experience. Leading console makers have recognised the decreasing value of the physical console, offering subscription-based game passes that promote a richer gaming experience, including access to game libraries, trials of new and upcoming games, and cloud storage.
The upward trend of the gaming sector is evident by observing just a few statistics:
– Global gaming revenue grew 105% in the four years to 2021 and is forecast to reach $305bn by 2027
– Twitch, the leading game-streaming service, averages 2.48m viewers per day in 2022 (vs. 750k in 2017), whilst hours streamed totalled 22.8bn in 2021 (vs 6.5bn in 2017)
– E-sports professional gaming had an estimated 532m viewers in 2022 and is projected to reach 640m in 2025. Most estimates have those aged 34 and under, Millennials and Gen Z, making up 71-80% of the viewership total
The potential of the younger generation, which has grown up on gaming, streaming, and spending on gaming, is immense. It is easy to see them pushing the boundaries of gaming in daily life. Nielsen research noted that millennials spent an average of almost six hours a week watching gaming content and more on donations to gaming video creators than on actual gaming subscriptions.
Growth investing boils down to investing in businesses that initiate, drive, and enact change in their respective markets. Alphabet, Amazon, Microsoft and Tencent are examples of exposure that we hold in cloud and gaming. Regardless of the macro environment, investing in companies with unique competitive propositions, strong operating and incremental margins, healthy balance sheets, and compelling strategic frameworks remains the focus. Such businesses are positioned to shape the changing landscape, be dominant players, and can also weather downturns – characteristics that help them run with tailwinds during growth periods and hold court even if macro conditions are volatile. Now more than ever, having the skills to identify these companies is essential to success.
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