The hidden players in digitalisation
In this period of disrupted quarterly results and high volatility, the lack of short-term visibility is a reminder of the importance of investment over the medium-term horizon. In this context, the structural trend in favour of the digitalisation of the economy has been more than ever reinforced, with players’ share prices tending to show resiliency along the lines of the five highest stock market capitalisations in the S&P 500 (Microsoft, Apple, Amazon, Alphabet (Google) and Facebook). These stocks now represent over 20% of this index, a level of concentration not seen since the 1970s.
For investors wishing to create exposure to this theme while still diversifying their portfolios, listed smaller / medium-sized companies offer an alternative. Within this global universe made up of several thousand companies, there are a large number of examples that allow investments in innovative players that are digitalising different types of businesses.
In business services, Tinexta is democratising electronic signatures, Esker is making customer – supplier communications paperless, Fortnox is automating accounting and financial processes and Atoss Software is improving data flows in human resources management. These are examples of companies that are often little known but that offer products for which interest is rising. Digitalisation will also be essential in public services in order to limit spending, boost efficiency and offset the steep rise in government spending. This is the market on which is positioned cBrain, a Danish microcap already present in 15 out of the 19 ministries in this country, which is recognised as European leader based on the efficiency of its government.
Teleworking also illustrates the acceleration and interest of the digitalisation trend. Even if not new, the recent widespread adoption of teleworking will probably enable this sector to become firmly entrenched, thereby benefiting already well-positioned players. This is case for Audiocodes, a specialist in voice digitalisation that is notably working with Microsoft in connection with its Teams platform and has just signed another partnership with Google. This is also the case for MNF Group, an Australian pioneer in digital communications, and Kape Technologies through its VPN offer (a technology that was still relatively unknown by the general public a few weeks ago but now is omnipresent for numerous teleworkers).
In order to pursue their development, companies operating in the digitalisation area must have access to reliable network infrastructures. To this end, Silicom and Ekinops design equipment that enables operators to develop and improve their networks. Similarly, Ateme’s video compression technology serves to limit network saturation while still maintaining the desired quality. At the same time, the Italian player Wiit has earned its place among the leaders in private cloud infrastructures in Europe.
Finally, cybersecurity will also be key in order to assure the long-term prospects of this ecosystem. COVID-19 should not make us forget the risk of computer viruses. F-Secure, a Finnish small cap, is seeking to carve out a role for itself on this vast market.
These different examples, present in the Mandarine Europe Microcap and Mandarine Global Microcap funds, illustrate the innovation offered by these companies, thereby making it possible to invest in this theme in a diversified manner through different sectors.
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By Microcaps team, May 2020
Image source : Pixabay