Digital transformation of business creates dazzling new winners

This might be the greatest time ever for shareholders. A perfect storm is on the horizon. The tailwinds are going to be amazing.

Many investors don’t realize it yet, but the great digital transformation unfolding now represents a tectonic shift in the way businesses will operate in the future.

This is setting up a once-in-a-lifetime opportunity.

It makes sense to buy infrastructure providers at every opportunity. It’s like buying weapons-makers ahead of a war.

Mary Meeker, the celebrated internet analyst turned venture capitalist, has a great sequence in her just-released “2019 Internet Trends” slide deck. She talks about the evolution of business models, beginning with International Business Machines (IBM) in the 1970s and culminating with the digital, data driven models of the current era.


IBM succeeded earlier by putting boots on the ground. It embedded engineers and consultants within enterprises. They learned the business from the inside, deriving key insights, then applying computing power to build better products.

By the 1980s, Chrysler (FCAU) was doing the same thing with focus groups. The company discovered and developed a new category, the minivan. This saved the business.

Two decades later, Amazon.com (AMZN) used data from its online store to pitch customers related products. This helped the Seattle ecommerce pioneer expand rapidly into new categories.

In 2002, Netflix (NFLX) was an ambitious mail-order DVD rental outfit. Managers reimagined the business as a digital streaming media company, and then built software algorithms to steer customers toward personalized content. Today the Los Gatos, Calif., media giant has 100 million subscribers, and its original shows are stitched together based on what it knows about customers.

It’s a Brave New World
of Product Development

Data-mining companies — using machine learning and other forms of artificial intelligence — are helping businesses collect, manage and, most important, understand data to make better products and boost sales/profits.

Adidas (ADDYY), for example, is working with Salesforce (CRM) to glean insights from customers to help develop new apparel.

And in China, a data-mining company called Pinduoduo connects consumer preferences directly to manufacturers. The technology company has 443 million buyers on stream.

This is digital transformation.

It turns conventional, hit-and-miss product development on its head by using data analytics to build better customer experiences … and more saleable products.

Meeker notes that 22% of enterprise workflows have moved to the public cloud to take advantage of better analytics. And chief information officers, according to a Gartner October 2018 survey, want to move even faster in the future.

Related post: ‘Queen of the Internet’ explains where the web is headed next

In other words, this trend is only beginning.

The Real Opportunity for
Investors is Infrastructure

Public cloud computing companies like Amazon Web Services, Microsoft’s (MSFT) Azure and Google (GOOGL) Cloud are obvious choices.

These businesses are aggressively building their AI and data analytic capabilities. They want to be in a position to offer enterprise clients a vertically integrated portfolio of features and services.

In many ways, Twilio (TWLO) is even more foundational …

This San Francisco company began by building scalable, cloud-based application programming interfaces (APIs) that software developers use to send voice, text and video messages over the internet.

If you’re getting a text message verification code, reminder or an automated callback, chances are you’re being touched by a Twilio API.

International Data Corp, a market research firm, forecast in a 2018 report that the total addressable market for voice and text messaging APIs would surge from $2 billion in 2017, to $10.9 billion by 2022.

It’s a great business, and Twilio has built best-in-class solutions. But managers are not resting there …


As they were rolling up big enterprise accounts from the likes of Facebook (FB) and Uber (UBER), they began to invest heavily in programmable video, payments processing, customer service, and Internet of Things APIs.

Twilio managers made the company a gatekeeper of the key pillars of digital transformation.

Sales grew 63% in 2018, to $650 million, and gross income reached $347 million, an increase of 64%. Despite this, the company is still producing a lot of red ink as managers invest aggressively to build out a one-stop-shopping-type platform.

During a May 1 conference call with analysts, CEO Jeff Lawson said the company recently launched Twilio for Salesforce — code that allows develops to easily add messaging, alerts and notifications to Salesforce workloads.

Twilio shares have run up 58% this year, and trade at 24x sales. While these valuation metrics are very rich, they are not completely unreasonable given the outlook for digital transformation, and how Twilio managers have uniquely positioned the business.

Shares recently traded at $141.50. Longer-term investors should consider buying Twilio into any decline toward $130 over the summer.

Best wishes,
Jon D. Markman

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