By: Mikhail Zverev
It has been a volatile year for the global financial markets. Despite all the market noise, however, there remain diverse investment opportunities in global equities. And no matter which market or sector, the key to investing is to focus on positive fundamental change in companies and to identify the growth drivers which haven’t been fully appreciated by the market.
The technology sector is one example where change is almost constant. We have seen transformative change in how consumers and businesses interact with technology, which now permeates everything in our daily lives. This growing volume of data has profound implications on how the telecommunication networks and data centres – the basic infrastructure of the technology revolution ‒ are designed and operated.
As the networks and data centres grow and change, we see several interesting trends.
Intelligence Of Networks
One is the increasing ‘intelligence’ of the networks. They are not ‘dumb pipes’ any more, just transporting data from A to B. Networks are increasingly configured and managed by more complex software tools and there is ever-growing focus on cyber security. The distribution and storage of media content around the networks is increasingly sophisticated, predicting where and when the demand from consumers will arise to ensure the best quality of service.
Another change is the growing energy use by networks and data centres. In the U.S., data centres are conservatively estimated to account for two to three per cent of the total electricity consumption. The cost and the environmental impact of this are increasingly in focus.
New opportunities are emerging from this trend for some companies. UK-listed ARM Holdings is one example. It has built its business on designing microprocessors for mobile devices. While that business remains vibrant, networking and data centre opportunities can become a new driver for its growth.
Increasingly complex tasks performed by the networks require more and more processors running the networking equipment and greater focus on energy consumption requires these processors to be more energy efficient. ARM Holdings’ processor architecture could fit the bill and it and its licensee-partners could potentially benefit from the growth in demand as a result. One such partner-licensee is Cavium, a U.S.-listed semiconductor company specializing in microchips for telecom equipment. It is embracing ARM architecture for networking and has designed a number of processors for networking equipment and data centre use. We expect to see greater adoption of these new products by both network equipment manufacturers and the so called ‘hyper-scale’ data centre operators, companies like Google, Facebook, and Amazon.
Naturally, manufacturers of the networking equipment are also reflecting these trends in their strategy. Historically networks developed separately – cellular, fixed line telecom, and cable TV operators ran on different technical standards, using very different equipment and architecture. This too is changing. Everything that travels through network – voice calls, messaging, Internet browsing data, or streaming video – is ultimately becoming just data. And the future design of telecommunication networks will reflect that with so called ‘converged networks’ establishing a common network fabric across every service that the operator provides.
The on-going merger between Nokia and Alcatel, two leading manufacturers of wireless and wireline networking equipment, is a reflection of this change. There are compelling cost and revenue synergies resulting from the merger. It was interesting to see Ericsson and Cisco, two other leading players in the field, to sign a partnership reflecting the same logic just a few months ago in November 2015.
These changes provide new opportunities for telecom operators, too. One example is Deutsche Telekom, a leading European telecom operator listed in Germany, which is among the pioneering adopters of the ‘converged networking’ approach. The company expects this to lead to cost savings, but also to improve the quality of its offering, making the customer experience more seamless and enabling it to provide services that could set high industry standard.
It often takes time for the market to fully appreciate and react to fundamental change on the industry or company level, especially when such change requires a detailed analysis of a technical subject such as technology. Whether it be the technology space or other sectors, finding companies that possess the ability to capture growth potential from such change opportunities remains crucial for equity investors.
Mikhail Zverev is head of global equities at Standard Life Investments.
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