(Veteran tech columnist Jon Markman publishes Strategic Advantage, a guide to investing in the great digital transformation of business and society. Click here for a two-week trial.)
A year ago at this time it was impossible to foresee the tumult of 2020, yet it was predictable what stocks would perform best. Thankfully this should be true again in 2021.
This is because the bigger narrative will not change. Digital transformation is still the largest, most investable trend in a generation. In 2021, expect investors to continue to reward the shares of companies that dominate efforts to reduce friction in business and society by replacing physical goods and services with software.
I have a list of five businesses that should get a lot of positive attention next year.
I began recommending Salesforce (CRM) – Get Report back in 2009. The $210 billion company is best known for its suite of cloud-based customer relationship management tools. For most large enterprises, CRM is a digital transformation jumping-off point. It helps them digitally manage customer service, sales leads, marketing and commerce all on one platform.
Salesforce operates a thriving ecosystem with third-party developers building custom software for specific applications. It is the best place for enterprises to dip their toe in a CRM marketplace.
In early December, the San Francisco, Calif.-based company announced the $27.5 billion acquisition of Slack (WORK) – Get Report, a maker of communication software. Salesforce shares promptly lost 18%. The same day, the company reported fiscal 2021 third quarter sales of $5.4 billion, up 20% year-over-year. Managers predict full-year revenues should top $21 billion, up 23%. It’s rare investors get an opportunity to buy a great business on the cheap.
Adobe Systems (ADBE) – Get Report also plays in the CRM space, although that part of its business is often overlooked. That’s a mistake. International Data Corp., a market intelligence firm, found that Adobe was the only firm other than Salesforce to gain market share in the customer relationship management space in 2020.
The strength of Adobe’s CRM offering is Marketing Cloud, a software suite that lets marketers target customers on social media, execute paid media campaigns, manage digital content and perform data analytics. These tools marry perfectly with Adobe creative software, the industry standard for digital media and advertisements.
The company announced in December that 2020 revenue reached a record $12.9 billion, up 15% versus a year ago. Managers explained that despite the pandemic, business is booming as traditional analog services go fully digital. Adobe is already a very large company with a $238 billion market cap, but it will get much bigger.
Sporting a $44 billion market cap, the business operates in three segments — helping with filings to comply with government regulations, capturing clinical trial data, and performing as a CRM tool for pharmaceutical sales professionals. It is a surprisingly large business that is about to get much bigger.
The entire healthcare sector is undergoing its own digital transformation. Many parts of healthcare still use paper for regulatory filings. Veeva’s cloud-based software eradicates all that paper. It’s an instant productivity tool and it’s leading to heady sales growth. On December 1, Veeva posted fiscal 2021 third quarter sales of $377 million, up 34% year-over-year. Profits during the same period surged 25% to $101 million. Managers now expect sales will reach about $307 million in the fourth quarter.
The other big digital transformation story of 2021 should be the emergence of sensors.
Lumentum (LITE) – Get Report is a spin out of the laser diode business from JDS Uniphase, one of the high-flying telecom equipment suppliers of the 2000s. Although 62% of sales still come from its legacy telecom business, managers are building new revenue streams from 3D sensing and lidar, a light-based radar sensor used for many autonomous vehicles.
For several years, the $7.5 billion company has had an important partner in Apple (AAPL) – Get Report. Lumentum laser components are essential for FaceID, Apple’s best-in-class biometric authentication. And Lumentum’s 3D sensor is used for augmented reality on iPhones and newer iPads.
The sexier investment story stems from Lumentum’s work with lidar. The company announced in October that researchers made a breakthrough with VCSEL arrays, getting immense amounts of light out of a tiny chipset at very power and low cost. These new chips could help self-driving cars finally become a reality. Apple is reported to be developing autonomous electric vehicles and could use component makers that it already depends upon, such as Lumentum.
On the other end of the spectrum, Maxar Technologies (MAXR) – Get Report is building optical sensors and software capable of snapping real-time, 3D photorealistic pictures from space. The potential applications for this kind of data are unlimited. Photorealistic imagery might be used by financial market traders to survey the state of agricultural crops, or if an oil rig has stopped functioning. There are obvious military applications, too, and of course surveillance.
It’s grown into a $2 billion market cap by developing optical hardware that is digitally enhanced with software, and the cost of getting powerful satellites into orbit has been slashed by reusable rockets from Elon Musk’s SpaceX.
The two companies will work together in 2021 to launch World View Legion, a new constellation of six high-resolution satellites. The launch news should be a tailwind for Maxar shares.
To be sure, 2021 will be full of twists and turns, yet investors should stay focused on the bigger picture. Digital transformation is a big trend that should get even bigger next year.