Finding the Best Investments at the Intersection of "the Trend" and "the Business" - 7investing 7investing
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Finding the Best Investments at the Intersection of “the Trend” and “the Business”

Simon looks for opportunities where higher-level trends meet superior company economics.

November 22, 2020

I’ve always been one who’s enjoyed industry conferences.

SXSW. CES. The Collision Conference. MIT EmTech. Each of these gave a fascinating view of the cutting edge research and higher-level trends taking shape in the markets.

Laptop and recording equipment in hand, I’d frantically jot down notes and grab interviews with the smartest folks in the room. Then on the plane ride home, I’d read back through everything I wrote and the investing takeaways began to emerge.

Many times, those ‘ahead-of-the-curve’ developing trends created fortunes for early investors. Digital streaming completely disrupted the cable industry, and Netflix’s (Nasdaq: NFLX) nearly 2,000% stock return of the past decade made it the poster child of the trend. Cloud computing became one of the market’s highest-flying sectors, and Amazon¬†(Nasdaq: AMZN) Web Services and Salesforce (Nasdaq: CRM) emerged as incredible investments.

But other times, these emerging higher-level trends didn’t turn out quite so well. 3D printing was expected to redefine industrial manufacturing, yet most of its most prominent companies have turned out to be lousy investments. Virtual reality could fundamentally change entertainment, yet it still hasn’t created much shareholder value. Quantum computing really sounds amazing, yet no one’s making any money off of it yet.

A few years ago, it dawned on me that the developing higher-level trends weren’t enough. Innovation still needed the right leaders at the helm of the right companies to embrace it and translate it into shareholder returns. “Top-down” market research alone wasn’t enough; we still needed to couple it with “bottoms-up” research into companies to find those perfect fits.

So as an investor, I feel I’ve improved the most in bridging the gap between those higher-level trends and the right company operating metrics.

Here are a couple recent examples:

  • Cybersecurity is an increasingly-important trend. Employees working from home and the Internet of Things are introducing more vulnerable attack surfaces, leading Chief Information Officers to throw money at vendors to ensure their organizations are adequately protected. CrowdStrike‘s (Nasdaq: CRWD) cloud-based endpoint security is gaining traction, and its Customer Lifetime Value being eight times that of its Customer Acquisition cost is incredible. Outstanding unit economics like those have resulted — justifiably — in a surging stock price this year.
  • The costs of genomic sequencing have been falling at a pace faster than Moore’s Law. Illumina (Nasdaq: ILMN) has aggressively driven down the costs of sequencing in order to expand its addressable market. A natural beneficiary of this trend has been genetics testing company Invitae (NYSE: NVTA), whose costs of goods sold related to running those sequencing tests have fallen 75% during the past five years. This is allowing the company to gather a flood of genetic data and expand its business.

As a summary, I’ve come to understand that the intersection of a massive market trend and superior company economics is where the greatest investments can be found. Great companies don’t just fall into the right place at the right time. They’re sculpted by the vision and methodical work of leaders, who embrace market changes to capture a ton of value for their shareholders.

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