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This fund manager believes we are nowhere near ‘peak internet’

Written by: David Harrison
David Harrison, manager of the Rathbone Global Sustainability fund, highlights the e-commerce stocks that are well-positioned to benefit from the digital revolution.

Silicon Valley, the 30-mile strip of land running south east from San Francisco to nearby San Jose, is one of the most hyped places on earth.

It’s where budding tech entrepreneurs want to be, it’s the engine room of the West Coast that accounted for 60% of all US private equity dollars invested in 2018.

While the West Coast is at the cutting edge of the digital revolution and most major US cities are at least close to the handle, the rest of the nation is very far behind.

The potential growth of digitisation in the US is massive. This applies to small businesses creating websites which don’t look like they were built in the late nineties. Many American businesses’ online presence is little more than a digital Yellow Pages advert — virtually worthless as an e-commerce portal.

And if the customer-facing parts of the company are that bad, imagine how much modernisation needs to happen amongst back-office stuff — about half of all inter-business payments are made with cheques rather than electronic transfers…

E-commerce stocks to watch

From the rise of e-commerce to better web design and investment in up-to-date business systems, companies selling these services have another decade of growth at twice the rate of GDP growth, in my opinion. That’s why I own a number of them, because I think we are nowhere near ‘peak’ internet.

This includes companies like Adobe in San Jose, which delivers that most basic yet versatile of digital documents: the humble PDF. It’s a simple yet crucial tool in an increasingly online age.

But that’s not Adobe’s only business. It owns a whole suite of other programmes that have become indispensable to professionals and hobbyists alike. Take Photoshop: it’s effectively a digital darkroom for photographers. Or InDesign, the 21st century’s typesetting department for publishers.

The digitisation of business has further to run, in my opinion, which is why I own Adobe. Also, I think the company’s move towards a subscription-model and away from one-off purchases should smooth cash flow and make its returns on capital much more attractive.

Cognizant, based in New Jersey on the other coast, is another company in the Rathbone Global Sustainability fund. This IT giant helps businesses to plan their digital strategies and provides the full range of services to make this happen.

It does a lot of work with healthcare providers as well as financial services, essentially specialising in helping intricate businesses digitise — a difficult job that not everyone can do! Cognizant is smaller than many of its competitors, but we think its value stacks up and its business model is sound.

One of the most high-profile Silicon Valley companies out there helping businesses roll out digital upgrades is Salesforce. It’s impossible to miss this company, given the $1.1bn tower that carries its name which can be seen from everywhere in the city. As of December 2018, Salesforce is now the largest employer in San Francisco.

I don’t own this company because I think it’s just too well-loved: but there’s a lot I admire about Salesforce, but it’s very expensive and doesn’t fit with the style I’m trying to run.

Its founder and chief executive, Marc Benioff, recently issued a mea culpa about the tech industry’s hand in San Francisco’s inequality ‘train wreck’. Many people in the tech industry have grandiose dreams and ideas for solving the world’s problems, but perhaps some have forgotten that help should really start at home.

Unhealthy capitalism

San Francisco has the second highest concentration of billionaires and the highest rate of homelessness in the US. It’s a stark reminder that Silicon Valley is exciting and innovative, but in no way some kind of utopia. San Francisco has always had a lot of people living on the street, but the number has risen noticeably since 2011 and now stands somewhere around 7,000. That’s close to one person out of every 100 city residents currently homeless.

And the irony is that this is supposed to be the place that disintermediated the world: the place that created the gadgets and systems that allow us to connect with anyone, anywhere. The cradle of e-commerce that helps us find the best-priced option with just a few taps of a smartphone, is now packed to bursting with more people than it can handle. I guess remote working was a fad.

All of this reminds me that capitalism isn’t that healthy right now. There are plenty of things that need fixing and companies’ social impacts are just as important as the products and the profits they make.

That’s why I run the fund I do. I love finding great companies that can succeed and make investors money, while not costing the earth or our society.

David Harrison manages the Rathbone Global Sustainability fund

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