Many of us can still remember the 1980s, when – following the invention of the microprocessor – personal computing spread across the western world with the likes of the Atari 400, the IBM PC and Dell machines. Today, in 2021, personal computers have become more versatile, powerful and diverse (in form) – particularly with the advent of semiconductor fabrication in the 2010s. In this industry report, our investment team at Bure Valley Group examines the state of Information Technology (IT) in 2021, where trends seem to be taking the industry and outlines some of the investment opportunities available for consideration.
The IT Industry: an overview
The global IT market is divided, approximately, between North America (35%), Asia (32%), Europe (22%) and Africa (5%) – figures which have remained fairly stable since 2019. The total market capitalisation is difficult to measure, since “IT” can encompass a range of businesses depending on definitions (e.g. do semiconductor manufacturing firms count, such as TSMC?). However, estimates put the worldwide market cap at $7850.57bn in 2020, with expected growth to reach $8370.95bn by the end of 2021; compound annual growth rate (CAGR) of 6.6%. Major players in the game include AT&T, Apple, Verizon Communications Inc. and Microsoft.
Gone are the days when IT consisted mainly of desktop computers in an office, or in a home study. Today, at least three major segments delineate important differences within the industry:
- Software and services. These companies provide internet-based services (e.g. online databases) or IT services/software, such as enterprise applications like Salesforce.
- Hardware & equipment. This segment includes: communications equipment; technology hardware, storage and peripherals; and electronic equipment and components (e.g. Intel processors and Nvidia graphics cards).
- Semiconductors. These companies produce semiconductors (and their peripherals) so that electricity in IT devices and equipment can be conducted efficiently.
Recent IT trends
Perhaps the most noticeable trend over the last five years has been the increasing prevalence of cheap, open-source software. Prior to this, software developers would largely make software “open source” if it was not profitable. Now, companies publish open source software to make their presence more widely known and increase market share. Examples include the popular internet browsers Mozilla Firefox and Chromium, the GNU/Linux operating system and products like Apache HTTP Server. Also, increasing global demand for cloud computing services is likely to also fuel demand for IT products and services, which provide the necessary infrastructure.
Since early 2020, of course, COVID-19 has dominated global markets – leaving millions of workers unemployed and leading many businesses to shut down. This led many IT businesses to experience a decline in revenue. Major investments were postponed and spending patterns were cut back. Today in 2021, the IT industry appears to be getting back on track as countries lift lockdowns and travel restrictions. However, significant uncertainties still remain. At present, the world is experiencing a shortage of microprocessors (“Chipageddon”) – partly due to the pandemic and the surge in demand for electronics as more people worked from home. Many expect that it could take 2 years – or more – for supply to catch up with demand.
The macro landscape is not completely negative for the IT industry, however. First of all, rising demand for chips could present investment opportunities with suppliers. For instance, Taiwan and South Korea dominate the chip-manufacturing industry – two countries neighbouring China, which has become increasingly aggressive. US security officials are recognising that this could leave western countries vulnerable if China acquired this global supply – leading to the CHIPS for America Act, which aims to funnel $52bn into US semiconductor manufacturers over the next 5 years. Companies like Intel, Qualcomm and Nvidia could stand to benefit.
The outlook for 2021 and beyond
At least three critical issues need to be addressed by IT industry players and investors in the years ahead. Firstly, digital transformation efforts need to be strengthened. Greater emphasis is being placed on speed, agility and flexibility – digitising operations via movement towards the cloud, artificial intelligence and edge computing. Secondly, the workforce needs to be reoriented and reskilled – particularly to enable greater remote work capabilities. Thirdly, supply network vulnerabilities exposed by the pandemic need to be addressed (e.g. relocating and diversifying production facilities). All of these could provide key opportunities for growth.
Startup investment opportunities
The reality is that the “computer-making” business is a difficult one for new players to break into. However, a range of exciting software-based startups are entering the landscape in niche areas, where larger and more established companies may struggle to pivot and compete. Cockroach Labs, for example, develops commercial database management software. Founded in 2015, the company saw its revenue more than double in 2020 amidst the pandemic. It raised $160m in Series E funding on 12th January 2021, and is aiming to double its workforce to 400 by 2022.
The UK is also proving itself a leader in this space, particularly with regards to cybersecurity. An example is Tessian; a London-based startup specialising in protecting employees’ emails using AI. The business has raised more than $120m and has been valued at over $500m. Over 350 global customers trust the business for email security including those in legal, financial services, healthcare and technology sectors. This company is not the exceptio, with others like Red Shift and Senseon also gaining growth and interest as they apply machine learning to tackle risks.
If you are interested in expanding your portfolio into these kinds of exciting spheres of investing, then we invite you to get in touch with us here at Bure Valley and to consider joining our exclusive investor network:
+44 160 334 0827