BABAF - 3 High-Growth Sectors With Significant Potential In The Next Decade

Summary

• This is the second part of our 4-part series on High-Growth Industries.
• Robotic Process Automation (RPA) is expected to be adopted swiftly and drive tremendous growth for the software and automation industry.
• AR and VR are the most anticipated industries we will talk about in this series, this is a sector one must keep an eye on in the upcoming years.
• An already more mature industry, but still with plenty of growth ahead is the Cybersecurity sector, which is expected to grow at a CAGR of 12% to 15%.

Introduction

This is the second part of our 4-part series on High-Growth industries. Previously we mentioned that this would be a 3-part series, but we quickly realized that simply wouldn't be enough to fit everything in, which is why we changed it into a 4-part series. In our previous article 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.

In this article, we will discuss 3 more of the 10 sectors and plenty of interesting companies within those sectors. The sectors we will discuss in this article are:

• Robotic Process Automation (RPA)
• Virtual and Augmented Reality
• Cybersecurity

So let’s get straight into it!

Robotic Process Automation (RPA)

Robotic Process Automation, in short RPA, is the first market trend we will discuss in this second part of this series. It is expected that RPA will be adopted swiftly and drive tremendous growth for the software and automation industry. With a CAGR between 15 and 25%, this can be considered as a sector with plenty of growth ahead of itself.

First of all, let’s start by explaining what RPA actually is. According to uipath.com RPA “is a software technology that makes it easy to build, deploy, and manage software robots that emulate human actions interacting with digital systems and software.” In layman’s terms, we can best describe it as software technology that is used to mimic the actions of humans. RPA has the functionality to perform a multitude of tasks, mainly focused on automating routine tasks, which are normally performed by humans.

In addition, we can’t disregard the link between RPA and AI. Robotic Process Automation technologies are based on algorithms, such as machine learning algorithms. AI assistant tools will play a part in this, as RPA software has the goal to work alongside humans for mundane and time-consuming tasks.

By now, you can probably imagine why RPA is interesting for multiple industries and companies worldwide. RPA is a great resource and useful addition to a company’s existing enterprise systems as it increases efficiency and increases cost savings. Furthermore, it is likely to improve accuracy and consistency, as humans are error-prone and these tasks can be more efficiently performed by RPA.

There are multiple interesting companies within this space. A company we discussed in our previous article is UiPath (PATH), which you can read here.

Blue Prism , was acquired by SS&C Technologies Holdings ( SSNC ) in March of last year for $1.6B. Blue Prism is a leading RPA company headquartered in the United Kingdom. Blue Prism has been named an RPA leader for the fourth year in a row by Gartner ( IT ), which is a technological research and consulting firm known across the globe and is considered as a leader within this space. Blue Prism has multiple big clients such as Ernst & Young, KPMG, IBM ( IBM ), Microsoft ( MSFT ), Accenture ( ACN ), Pfizer ( PFE ) and Google ( GOOGL ) (GOOG).

Automation Anywhere is a private company headquartered in San Jose, California. Similar to Blue Prism, Automation Anywhere is one of the companies leading the race in developing software solutions to automate mundane tasks. Gartner also named Automation Anywhere as a 2022 Gartner Magic Quadrant Leader. In addition, Automation Anywhere is widely considered as number one within the RPA industry.

In its latest funding round in October of 2022, the company raised $200m, which should be sufficient for the next several years. The company expects this to be enough to reach profitability. Automation Anywhere is backed by SoftBank ( SFTBY ). Before this latest capital raise, the company raised $290m at a valuation of $6.8b in its Series B funding back in 2019. Automation Anywhere has several big investors, such as Salesforce Ventures ( CRM ) and Goldman Sachs ( GS ).

In addition, they have plenty of big clients worldwide such as Caterpillar ( CAT ), UnitedHealth Group ( UNH ), and CVS Health ( CVS ), just to name a few.

According to Automation Anywhere, 80% of the largest enterprises consider Automation Anywhere as the number 1 RPA platform.

Multiple big companies have acquired or started partnerships with small and big RPA providers. Microsoft has acquired RPA players over the years, such as Softomotive . Salesforce acquired Servicetrace back in 2021 for as much as $6.5b . Servicetrace is part of Salesforce’s Mulesoft Division. The goal of Salesforce with this acquisition is to enable customers to build automated workflows, which would avoid third-party tools such as UiPath, Automation Anywhere, and Blue Prism.

It is important to notice that there are risks here. Pureplay RPA vendors might see their market share being fragmented due to increasing competition, and pricing pressures. As discussed above, some companies are integrating automation directly into their platforms. Companies like SAP ( SAP ), Workday ( WDAY ), and Coupa ( COUP ), are just a few companies that are already doing this.

We believe companies like Adobe ( ADBE ), Intuit ( INTU ), Oracle ( ORCL ), and many more big tech companies will eventually be interested in buying an RPA player or starting big partnerships with RPA companies. In particular, ERP companies should look into RPA acquisitions to build automation into some of their core products. This could eventually create great exit potential for investors in case of a buy-out.

Other companies we could have discussed in this section include companies such as NICE Ltd ( NICE ), and Pegasystems ( PEGA ), to name a few public companies.

Virtual and Augmented Reality

This is possibly the most anticipated high-growth sector we will talk about in this series. With a CAGR of 30 to 40%, this is a sector one must keep an eye on in the upcoming years. Over the last year, VR and AR have been hot topics, and the most noticeable shift in momentum towards VR and AR was Facebook's name change to Meta ( META ).

So how can we best describe VR and AR? By now everyone has heard about it, but what exactly are VR and AR?

Virtual Reality ((VR)): Virtual Reality can best be described as an alternative 3D environment. This environment is created with hardware and software and users might need to wear so-called wearables. These are devices such as goggles or headsets, for example, the Oculus VR from Meta. In this alternate universe, users can interact and explore the virtual surrounding. This could be very useful in office settings. For example, meetings could become much more life-like while the different people within the meeting could be all over the world. I think this is best shown through this video from Meta .

Augmented Reality ((AR)): Compared to VR, Augmented Reality doesn't create an alternate universe. Augmented Reality as the name suggests is an enhanced version of the physical world. This enhancement can be achieved through the usage of sound, visual elements, and other sensory stimuli. For example, an overlay gives you 3 additional monitors to work on, while in reality, you are sitting in front of your little laptop. The best-known example of Augmented Reality might be Pokémon Go, which created hype when the game was released back in 2016. Pokémon Go was developed by Niantic, which was founded as a part of Alphabet back in 2010.

In addition, AR can be used for trying on items. This is something Shopify ( SHOP ) is looking at. There are plenty more usages for AR, another example is the filters on pictures, which can be used on multiple social media platforms such as Snapchat ( SNAP ) and TikTok, owned by ByteDance ( BDNCE ).

Make no mistake, VR and AR can change our future in a major way. As with many of the sectors we discuss in this series VR and AR have the potential to impact multiple industries. As such, we believe AR and VR can be adopted swiftly, once there is a solid product that can be scaled quickly.

Again, the main risks and challenges for this industry are regulations and people refusing to adopt, but we believe this is fairly unlikely. Once companies start using VR and AR, it will be hard as a person to refuse the usage of such equipment as it might be needed in meetings and for teamwork purposes.

Barriers to entry certainly exist. Not only is the development of AR and VR hard, but it is also expensive. Small players may not fare as well, since pretty much all the big tech companies are investing significantly within this sector as they realize that this industry can be revolutionary and being first could be rewarded significantly. The race for the market leader position can be seen in Meta pivoting and investing as much as $19.2B in the metaverse in 2023, while they have already invested over $36B over the last years .

Now let's take a look at some companies. As mentioned above, pretty much every company within big tech will be looking at VR and AR, and if not they will likely be integrating it into their products. But, now let's see which small caps could play a role in this industry. Unity Software ( U ): Unity is a game development platform. Users can use Unity's software to easily develop games. Unity is focusing on AI as well, for example, its Proto-Residual Architecture (ProtoRes) seems interesting. Unity describes ProtoRes as the following :

Our work focuses on the development of a learnable neural representation of human pose for advanced AI-assisted animation tooling. Specifically, we tackle the problem of constructing a full static human pose based on sparse and variable user inputs (e.g. locations and/or orientations of a subset of body joints) "

Magic Leap: This is a private company, but recently Saudi Arabia's sovereign wealth fund took a stake of over 50% . Further investors include Alphabet and Alibaba ( BABA ) to name a few. Furthermore, its current CEO, Peggy Johnson, is a former Microsoft executive.

Magic Leap is focused on developing the most advanced AR technology. "Their goal is to integrate the digital into the physical world to amplify human potential", according to the website . In addition, Magic Leap has over 4000 patents. Furthermore, their latest product the Magic Leap 2, is a good-looking functional product, as can be seen in the slide below. In comparison, this looks a lot less heavy than the Meta Quest 2, which we posted above. That said, the Magic Leap 2 is focused on professional use and it looks like a really interesting prospect for the future. If you are interested feel free to check it out on the company's website . As far as I can see, the reviews are very positive and people are blown away by the capabilities of the Magic Leap 2.

PTC Inc. ( PTC ) : While PTC isn't solely focused on AR and VR it does have a significant presence in the AR space. The Vuforia platform is their flagship product for AR. Vuforia is an AR platform designed for developers. With Vuforia, developers can create AR experiences for smart glasses, mobile devices, and more. Vuforia enables its developers to create AR applications for a wide range of industries.

Nvidia ( NVDA ): Although NVDA isn't necessarily a developer of AR or VR products, they are crucial for the future of the industry. NVDA's GPU's will be crucial for high-performance AR and VR rendering.

Qualcomm ( QCOM ): Similar to NVDA this one deserves a short mention as well. Their Snapdragon processors are widely used in smartphones, but also in AR/VR devices.

Vuzix ( VUZI ): Vuzix is a leader in the smart glasses and augmented reality goggle industry. Vuzix is a New York-based company that designs, manufactures, and markets wearables for the AR industry worldwide. Their main customers can be found in the medical markets, defense markets, and the security sector.

Cybersecurity: The Business of Protecting Your Data

First of all, what is Cybersecurity? "Cybersecurity is the practice of protecting critical systems and sensitive information from digital attacks", according to IBM . So why Cybersecurity?

Many of us would probably say this has been a big topic for over a decade already. While this is true, the industry is expected to continue this growth trajectory further. With a CAGR between 12 and 15%, we believe this sector will continue to grow as new problems around the world arise. Furthermore, the need for cybersecurity isn't slowing down anytime soon. The huge amounts of data that are stored on a daily basis need to be protected somehow after all.

Adoption isn't an issue either within this industry. We already know from the past that people accepted cybersecurity software with open arms, as it is necessary to protect your own personal data online. After all, no one wants their bank details or private photos to be leaked.

The barriers to entry are significant though. While big companies dominate this market, smaller companies might be able to break in by focusing on a more niche market within the industry.

As the cybersecurity space is more mature than the other industries we discussed in this article, there are already several large companies in there. That said, these companies are still growing at a rapid rate with a lot of them already being profitable. Let's take a look at some of the companies below.

CrowdStrike ( CRWD ): CrowdStrike is down over 60% from its all-time high. Nevertheless, CrowdStrike dominates the endpoint security market. CrowdStrike remains the market leader among endpoint security candidates. As can be seen in the chart below, CRWD has been able to grow revenues significantly and was able to remain its gross margin at a steady 73%+, which shows that they have good pricing power.

Furthermore, CrowdStrike Falcon is considered "One platform for Complete Protection", according to CrowdStrike. With over 20,000 clients relying on their products and their incredible growth, as can be seen in the chart above, we believe CrowdStrike has a bright future ahead of itself.

Zscaler ( ZS ): Another one of the pandemic darlings within this industry. This stock soared by almost 1000% from its Covid-19 bottom to its 2021 all-time high. Currently, the stock is down 60% since that top. Zscaler is another top operator in the cybersecurity space. They are the creator of The Zscaler Zero Trust Exchange, which is an integrated cloud platform that reduces risks and complexities associated with perimeter-based security, according to Zscaler . One may ask himself, "What is perimeter security?" "Perimeter Security is the traditional practice of protecting privileged data with firewalls and credentialed intranets, which requires more modern solutions such as Zero-Trust methods in a connected, cloud-based age." According to Cylo.io .

Palo Alto Networks ( PANW ): Although Palo Alto is barely profitable when we take a look at profitability, they have an extensive product line of 'Next-gen solutions'. As can be seen in the chart below, Palo Alto has been growing significantly, with no signs of slowing down.

From the chart, it might look like the gross margin has been decreasing significantly but make no mistake: the gross margin is sitting around 70%, which shows strong pricing power. In addition to its strong gross margins, its continuous revenue growth of close to 30% YoY is no joke either.

Fortinet ( FTNT ): Fortinet is another one that is highly promising within the cybersecurity industry. It is in direct competition with PANW, which we discussed above, and with companies like Check Point ( CHKP ). Fortinet is considered a leader in state-of-the-art firewalls. Furthermore, it also competes with ZS for Zero Trust access.

There are many other companies, which are interesting to look deeper into, for example, Cloudflare ( NET ). In its latest Q4 earnings, they discussed a few interesting points, and a fellow contributor took a deep dive into that Q4 report, which I would recommend reading. You can find it here . Another fellow contributor discussed the Cybersecurity industry more in-depth, which we couldn't do in this article as it would get too long. If you are interested in this space, I would suggest taking a look at this article .

Closing Words

First of all, thanks for reading the second 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.

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