IBM - 3 High-Growth Sectors With Great Potential

2023-04-11 14:21:57 ET

Summary

• This is the third part of our 4-part series on High-Growth Industries.
• Space Exploration and Blockchain/ Cryptocurrency are 2 sectors poised for high growth in the years to come.
• Renewable energy will experience continuous growth due net zero incentives and achieving energy independence.

Introduction

This is the third part of our 4-part series on High-Growth industries. In previous articles in this series, we covered: Why someone should invest in high-growth companies, what the risks are with investing in high-growth industries, what you should look for when searching for high-growth opportunities, and much more. We highly advise you to check out that article before continuing further with this one. The second part where we discuss Robotic Process Automation, Virtual, and Augmented Reality, and Cybersecurity can be found here .

In this article, we will discuss 3 additional sectors and plenty of interesting investment opportunities within those sectors. The sectors we will discuss in this article are:

• Space Exploration
• Blockchain and Cryptocurrency
• Renewable Energy

So let’s get straight into it!

Space Exploration

Space exploration is the first market trend we will discuss in the third part of this series. Space Exploration has gained a lot of hype in recent years, but it has something mythical to it, which has made humankind interested in it for a very long time.

It is expected that investments in the Space Exploration sector will continue as government spending will increase as space is important for technological infrastructure and as a defense mechanism. With a CAGR between 12.5 and 15%, the sector has plenty of room to grow.

So first let’s have a look at what Space exploration entails. Three major sectors of the space industry are:

• Satellite Manufacturing: This sector is composed of satellite and their subsystems manufacturers
• Launch Industry: This sector is composed of launch services, vehicle manufacturing, and subsystem manufacturing
• Support Ground Equipment Manufacturing: This sector is composed of manufacturing items like control stations, VSATs, mobile terminals, direct broadcast satellite dishes, and other specialized equipment.

So we now know what the space industry entails, but to find a high-growth industry it is important to look at a few factors before investing in such an industry, which we discussed in part 1. As we mentioned, the market trend looks good for the space industry. It has plenty of room to grow and it has usages in a lot of different industries, such as the telecommunications industry.

The adoption rate is a subject of debate, as this varies widely across the multiple different sectors within the space industry. Telecommunications, for example, has been widely adopted across the globe and has significant space presence. By contrast, it is unknown how easily space travel and other such future space industries will be adopted. These are things we can’t make an accurate statement on yet.

The space industry has a lot of risks and challenges. Often space exploration companies are highly subsidized by the government as they are important for global power projection. Nonetheless, the space industry is quite often an absolute money drain. Space exploration requires a lot of investment before one can launch the first rocket or develop the first satellite. This is why the barrier to entry is so high as well. Furthermore, companies like SpaceX ( SPACE ) and Blue Origin ( BORGN ) have billionaire owners, which have a lot of influence, which makes it very difficult to compete with them.

Now let’s take a look at some of the companies within the space industry that have a lot of potential. There are many interesting companies in the multiple different sectors that exist within the space industry.

First let’s take a look at a communication satellite company, AST SpaceMobile ( ASTS ). ASTS did something most considered impossible only 2 years ago. ASTS is involved in Direct-to-device (D2D) connectivity. D2D is the future of telecommunications. Satellite phones have been available for decades, but, they are quite inconvenient and expensive. This is where ASTS tries to make the difference - AST SpaceMobile tries to make it possible to connect regular phones with satellites.

Although there is a lot of skepticism around the potential of D2D connectivity, one of their competitors has been able to get big partnerships. Apple ( AAPL ) announced its partnership with Globalstar ( GSAT ) for the iPhone 14. Although $450M is peanuts for a company like Apple , this was quite a big amount in our opinion. In addition, we have seen Starlink ( STRLK ) from Elon Musk announce a partnership with T-Mobile ( TMUS ) to provide general text service from its 2 ^nd generation Starlink satellites.

Rocket Lab ( RKLB ) is an end-to-end space company with an established track record of mission success. They deliver reliable launch services, spacecraft components, satellites, and other spacecraft and on-orbit management solutions that make it faster, easier, and more affordable to access space, according to the company.

Rocket Lab’s leadership team hosts presentations focused on the progress the company has made since its de-SPAC in August 2021, its current roadmap, development of the Neutron launch vehicle , and future growth opportunities.

Rocket Lab is second only to SpaceX when it comes to launch frequency and is one of only two independent, dedicated American companies that regularly go to orbit. Rocket Lab had a successful 2022, in particular, the 100% mission success rate is very impressive, as can be seen in the image below.

Rocket Lab says Neutron will be designed for human spaceflight as well. In addition, RKLB had 2 successful Electron launches in Q4 2022 for a partnership with NASA. For a short summary on RKLB, you might be interested in our twitter thread .

Blockchain and Cryptocurrency

There is no sector that is more controversial than the Cryptocurrency industry. Nonetheless, the sector has a lot of growth potential with an expected CAGR between 20 and 25% till 2030.

The sector as a whole had a rough year, with multiple important brokers and banks collapsing such as FTX, Voyager Digital, Three Arrows Capital, Silvergate Capital ( SI ), Signature Bank ( SBNY ), and many more. This caused a collapse in confidence in Bitcoin ( BTC-USD ) and cryptocurrencies as a whole.

But, it is important to realize that blockchain technology has many possible applications beyond cryptocurrencies, this shows the significant potential for adoption on a big scale . For example, NFTs, smart contracts, personal security, healthcare, and many more. Blockchain can be used to create more transparency and fairness in financial transactions. In addition, it is able to lower the cost of transactions by reducing third-party fees and eliminating bureaucratic red tape.

Let’s say you want to invest in cryptocurrencies and blockchain, but don’t want to buy Bitcoin or Ethereum ( ETH-USD ). Well, one can buy shares in a company involved in blockchain. Just to be clear, a lot of big companies are working on blockchain and there are other opportunities outside of buying crypto miners. Some companies that are involved in providing blockchain-based services are companies such as Microsoft ( MSFT ), Amazon ( AMZN ), and IBM ( IBM ). But, the 2 companies we will light out below will be more straight forward investments toward the crypto space.

Coinbase ( COIN ), is a leading cryptocurrency exchange for buying, selling, transferring, and storing cryptocurrency. The company has a large user base and has experienced significant growth over the last years. Their revenues are highly influenced by the crypto market due to the fact that there is a lot more traded volume during a bull market compared to a bear market, as can be seen in the chart below, which shows their revenues in millions of USD on the left side and gross margin on the right side.

The company went from highly profitable in 2021 to large losses in 2022, as the crypto market plummeted. At its peak in late 2021, the total market cap of all cryptocurrencies combined was close to $3T, in comparison to early 2023, where the total market cap dropped below $800B for a bit.

Crypto exchanges experienced the lowest volume in 2 years in 2022 , which caused revenues to fall off a cliff. A new bull market could lead to a significant increase in volume and thus a significant increase in revenue for COIN. We could say that the company clearly experiences cyclicality, as it is highly influenced by the hype (which increases volume) in the crypto market.

Riot Platforms Inc. ( RIOT ). Riot Platforms is a so-called Bitcoin Miner. What is special about RIOT is that they have all their facilities in the United States, which means there are fewer geopolitical risks involved compared to some of its peers. RIOT expects to achieve a total self-mining hash rate of 12.5 EH/s, assuming they have full deployment of approximately 113,520 Antminer ASICs, according to the company.

EH/s stands for Exahash per second, where Exahash is a unit of measurement for cryptographic computing power, known as the hash rate. 1 EH/s equals 10^18 hashes per second. In simple terms, this is the speed at which a computer is completing an operation in the Bitcoin code. The higher the hash rate, the more operations a computer is able to complete. This increases the chances of mining a block and thus receiving the block reward.

According to RIOT’s Q4 2022 earnings, they had a break-even price for each BTC mined of $11,225. This is pretty impressive considering energy prices were sky-high in 2022. The company’s self-mining fleet will consist of the latest S19-series miner model, which will consume approximately 450MW of energy in total. In addition, RIOT will host 200 MW of institutional Bitcoin mining clients, according to the company.

Riot Platforms has been able to grow revenues at a fast rate due to its fast expansion of Bitcoin mining facilities over the last few years. How did they finance that, one may ask? Well, they have increased their shares outstanding significantly, as can be seen in the chart below. This allows them to profit from economies of scale, which could help them in the future as this lowers the break-even price of their mining facility.

An important chart to take a look at is management’s decision-making, as can be seen in the slide below from their latest investor presentation. This shows the key decisions they made over the last years to set up the company for the future.

I believe RIOT is the leading bitcoin miner and is the first one to look at when you consider investing in or trading a bitcoin miner. That said, these bitcoin companies often trade like a leveraged bitcoin position, so be aware of the risks.

Renewable Energy

Renewable energy has become an increasing topical theme over the last years. The industry is growing at a fast pace worldwide as more and more people become concerned about climate change and countries look to limit their dependence on foreign sources of fossil fuels, the recent geopolitical concerns with Russia and the Middle East have caused an even bigger demand for a fast-paced transition to renewable energy.

The renewable energy industry is expected to grow at a CAGR of 15% to 20% until 2030. The total market for renewable energy is significant and in my opinion, this is a must-watch industry to keep an eye on for investors. We don’t have to discuss the adoption rate here, as we can already see how renewable energy is being adopted and that this trend doesn’t seem to be slowing down.

The problem with most renewable energy forms is that supplies are far more variable compared to other means of energy generation. For example, fluctuations in sunlight levels mean that solar power supplies are a lot less consistent than those derived from sources such as nuclear power plants.

Another important question to discuss is what can be considered clean energy. In my opinion, Uranium will be absolutely necessary for the next few years to fulfill the demand for energy, though the contentious definitions of “renewable” and “low-carbon” are roadblocks at the political level preventing increased spending on nuclear energy.

I’m an advocate for Nuclear energy as I believe it is the way to go, but for this topic, we will only discuss renewable energy companies that are considered “clean energy” companies, but if there is interest from the Seeking Alpha readers I’ll consider doing a series on Nuclear energy and corresponding investment cases. Let me know in the comments if this is something you would be interested in.

For this part, we will be looking at various sources of power, such as hydroelectric, solar, and wind. There are many interesting companies we can take a look at such as Plug Power ( PLUG ), Clearway Energy ( CWEN ), Avangrid ( AGR ), and many more. Nonetheless, we want this article to not get too lengthy, that’s why we will discuss 2 companies in short.

The first company we will discuss is Brookfield Renewable Partners L.P. ( BEP ), Brookfield Renewable is a leader in renewable energy, and it seems to be well-positioned to profit from the increasing demand for clean energy. They operate across 5 different continents, and own a diverse portfolio of wind, solar, hydro, and other distributed energy and sustainable solutions. The company mentions that it is their goal to help accelerate the global transition to net zero.

The company made significant investments in 2022 and is committed to its long-term dividend growth policy with the company currently yielding 4.43%. The company is currently unprofitable, so there currently is no gross profit nor gross margin available, but below you can see the YoY revenue growth chart for BEP.

As you can see, the revenue growth has been quite inconsistent, with negative growth in 2020, but in the last 2 years the company has been able to grow revenues again at a nice rate and they plan on continuing this trend in the future.

The last company we will take a look at in this article is Enphase Energy ( ENPH ). Enphase stock has performed incredibly well over the last years. The stock is currently up close to 4850% on a 5-year basis. Enphase is a global energy technology company that designs, develops, manufactures, and sells home energy solutions for the solar photovoltaic industry in the United States and internationally.

While its explosive growth might be over, ENPH still seems to be positioned well to continue growing at a rapid pace. In the chart below you can see the revenue and gross profit growth and the corresponding gross margin of ENPH from 2013 to 2022.

In addition, in the graph below you can see the Revenue and Gross margin growth on a year-on-year basis. As can be seen, the company had an incredible year in 2019, where they achieved 134% growth in gross profits and a close to 100% increase in revenues, which are very impressive numbers.

Nonetheless, I wouldn’t call the stock cheap, though the company is down close to 23% YTD, and down over 40% since its all-time high in late 2022.

Conclusion

First of all, thanks for reading the third part of our 4-part series on "10 Sectors Likely To Generate Good Returns In The Next Decade". We hope you enjoyed it. We are looking forward to additional feedback and stocks to cover for our upcoming articles within this series.

We believe investing in the future could possibly generate significant returns in the future. However, there aren't any guarantees and the companies covered in this article might not all succeed. There are plenty more companies we would like to have covered, but this article would have become far too lengthy. We are looking forward to covering some of these companies more in-depth in the future.

I hope to see you again when we release our final part of this series!

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