Investing in Digital Infrastructure

Profiting from players behind Megatrends.

Hi Everyone,

typical examples of infrastructure include roads, airports, ports, oil and gas networks, digital networks, energy generation, including renewable energy (e.g. wind, solar, hydro, biomass), water supply, wastewater, and waste disposal as well as social infrastructure, which includes public facilities such as schools, hospitals, administrative buildings, and social housing. But today we are going to focus on digital infrastructure. Because the topic is so extensive, I will be brief here and give you an overview of it and the companies that are involved in its development.

A mistake many investors make is to ignore the obvious. Instead of chasing the latest hype, ask yourself: "How is this hype made possible? What's one level below? Which companies are indirectly or directly involved in the structures that underlie our daily lives?”

While the need for the latest software is uncertain, one thing is certain: the need for the basic framework for software companies is there and will continue to grow in the future. A project in the emerging digital economy might fail, but the need for new “bridges and roads” that support this economy will grow. Digital infrastructure is the key foundation and enabler for the 21stcentury economy. Just like roads and rails, digital infrastructure is the foundation of digital economic activities and technological applications.

Enabling the world of tomorrow

Digital infrastructure is enabling the world of tomorrow by providing the platform for new technologies to be developed and deployed. This infrastructure includes the internet, cloud computing, and data storage. It enables companies to develop new applications and services that consumers and businesses can use. Additionally, digital infrastructure provides the foundation for the development of new business models and the growth of the digital economy.

Digital infrastructure is one of the essential enabling technologies for a networked and instrumented environment, enabling what we refer to as the "Internet of Things" (IoT). The term "Internet of Things" refers to a situation in which physical items, such as electronics, are both intelligent and connected, with the ability to collect and share data, allowing for novel interactions that can help usher in a new era of technology. As mobile phones, tablets, sensors, and integrated chips grow more common, they provide unparalleled access to data and meaningful usage by utilizing real-time analytics and delivering insights for effective action. Just to give you an idea, here are some use-cases that get the most attention in the industry:

Smart Health

With a growing population comes a number of new concerns, such as lifestyle-related health conditions, chronic diseases, and cost increases. The digital infrastructure, which enables billions of connected devices such as sensors, mobiles, actuators, and so on, is enabling holistic tracking, remote home calls, data-driven treatments, and cloud-based medical records more accessible and viable.

In the future, connected devices may remind users to go for a walk if they believe it will provide a specific benefit. If medications are to be taken at regular intervals, users may be notified when the time has come. With the advent of sensors and DIY diagnosis, patients should be able to diagnose the problem at the right time with timely treatment from doctors and hospitals. Wearable devices can save billions of dollars by reducing the number of hospital visits, diagnoses, reports, and scans by capturing data and instantly updating doctors. With the advancement of such technologies, even future recommendations for potential treatments can be automated.

Smart homes

A Smart Home anticipates and responds to occupants' needs, trying to improve their comfort, convenience, security, and entertainment by utilizing the Internet as the backbone for connections with and among numerous devices. Smart homes are on the cusp of becoming mainstream, thanks to the incorporation of sensors into household products, increased network capacity, and greater connection.

Smart home gadgets would be able to detect when you wake up and start the coffee maker; remind you to take your medications on time; switch off the lights when you fall asleep, and recommend meals that use up ingredients before they go bad. The key drivers for the smart home market are increased security, comfort, functionality, and lower energy use. Smart homes are likely to be driven by the increased adoption of smart washing machines, smart refrigerators, smart air conditioners, smart vacuum cleaners, smart TVs, and so on.

Smart e-commerce

Imagine you are watching a movie at home and like a pair of shoes that one of the actors is wearing. Using gestures, you point to the pair of shoes and the TV connects to the internet and provides you with more information about them. You decide to buy them, the TV connects to the nearest retail store, orders them and a drone delivers your shoes in the next hour to your door.

While the customer can order his product from the comfort of his sofa, structures are required in the background to make this possible. Amazon, JD, and Alibaba have effectively proved the potential and business value of enhanced automation via robots and IoT sensors. Despite this, a major portion of the industry has yet to appreciate the full potential of IoT and the usefulness of strong analytics produced from sensor-generated data for optimizing warehousing operations.

Business of things

Considering the benefits derived from digital infrastructure, many companies are investing in it. Technology visionaries and startups are flooding the market with smart devices and are intent on taking it to the next level, where these devices would be collectively intelligent. The building blocks for any digital infrastructure set-up include:

• Hardware components such as sensors, cameras, and microphones extract and collect data by detecting movement and capturing images.

• Semiconductors to analyze and process the information.

• Telecom networks and information exchange allow devices to connect to one another and to a cloud-based network.

• Software applications and platforms to integrate data and create the user interface, analytics, automation technology, etc.

Digital infrastructure can provide businesses with enhanced transformation opportunities. Utilizing these new capabilities can enable businesses to provide value-added services to their customers. RFIDs, sensors, wearable tech products, connected devices, and chips are creating real-time data for businesses, which can be analyzed to generate better insights.

Who is involved?

Now we are getting to the interesting part: Which public companies are involved in building digital infrastructure? I am going to focus on a few players that are worth a closer look because otherwise, the list would simply be too long.

The digital infrastructure landscape has four key investable sectors:

• Connectivity and transportation (The physical infrastructure that carries digital data between devices, data infrastructure, and services).

• Storage and processing (The computing power to run services and storage of data of users).

• Services and applications (The applications that create economic value-add to business sectors and customers).

• Terminals and devices (The interfaces between users (human or machines) and the digital services and applications).

Connectivity and transportation

Crown Castle CCI 0.00%↑ : Crown Castle Inc owns and leases roughly 40,000 cell towers in the United States. It also owns more than 85,000 route miles of fiber. It leases space on its towers to wireless service providers, which install equipment on the towers to support their wireless networks. The company's fiber is primarily leased by wireless service providers to set up small-cell network infrastructure and by enterprises for their internal connection needs. Crown Castle's towers and fiber are predominantly located in the largest U.S. cities. The company has a very concentrated customer base, with more than 70% of its revenue coming from the big three U.S. mobile carriers.

American Tower AMT 0.00%↑ : American Tower owns and operates more than 220,000 cell towers throughout the U.S., Asia, Latin America, Europe, and the Middle East. It also owns and/or operates 25 data centers in eight U.S. markets after acquiring CoreSite. On its towers, the company has a very concentrated customer base, with the most revenue in each market being generated by just the top few mobile carriers. The company operates more than 40,000 towers in the U.S., which accounted for more than half of its total revenue in 2021. Outside the U.S., American Tower's greatest presence is in India and Brazil, where it operates roughly 75,000 and 19,000 towers, respectively.

Iridium Communications IRDM 0.00%↑ : Iridium Communications Inc. provides mobile voice and data communications services and products to businesses, the United States and international governments, non-governmental organizations, and consumers worldwide. The company offers postpaid mobile voice and data satellite communications; prepaid mobile voice satellite communications; push-to-talk; broadband data; and Internet of Things (IoT) services.

Vodafone Group VOD 0.00%↑ : Vodafone operates mobile and fixed-line networks and businesses in more than 20 countries. Its largest market is Germany, where it is the second mobile operator after Deutsche Telekom and owns a cable network after acquiring Kabel Deutschland in 2013 and Liberty Global Germany in 2019. In the U.K. and Italy, it acts as a mobile operator, while in Spain, it offers converged services after the acquisition of cable operator Ono in 2014. Vodafone also has operations in several Central European and African countries, which combined represent around one-third of revenue.

Cogent Communications Holdings CCOI 0.00%↑ : Cogent carries over one-fifth of the world's Internet traffic over its network and is an Internet service provider for businesses. Cogent's corporate customers are in high-rise office buildings, and the firm provides them with two types of connections: dedicated Internet access, which connects them to the Internet, and virtual private networking, which offers an internal network for employees in different locations.

In addition, there are also other companies in the field such as Telus TU 0.00%↑ , BCE BCE 0.00%↑, Verizon VZ 0.00%↑ and AT&T T 0.00%↑.

Storage and processing

Equinix EQIX 0.00%↑ : Equinix is a retail provider of data centers, enabling hundreds of enterprise tenants to house their servers and networking equipment in a colocated environment. Tenants can then connect with each other, cloud service providers, and telecom networks. Equinix operates 240 data centers in 66 markets worldwide.

Digital Realty DLR 0.00%↑ : Digital Realty supports the world's leading enterprises and service providers by delivering the full spectrum of data center, colocation, and interconnection solutions. Digital Realty's global data center footprint gives customers access to the connected communities that matter to them with more than 284 facilities in 48 metros across 23 countries on six continents.

Iron Mountain IRM 0.00%↑ : Their big core business is record-keeping. They have a bunch of, essentially, storage facilities that are designed to store paper records. They're slowly getting into the data center space because they realize that paper records are not going to be a thing forever and they're slowly pivoting their business over to that.

Oracle ORCL 0.00%↑ : Oracle Corporation offers products and services that address enterprise information technology environments worldwide. The company markets and sells its cloud, license, hardware, support, and services offerings directly to businesses in various industries, government agencies, and educational institutions, as well as through indirect channels.

And of course, there are well-known cloud platforms like Microsoft Azure MSFT 0.00%↑ , Tencent Cloud, and Alibaba Cloud BABA 0.00%↑

Services and applications

SAP SE SAP 0.00%↑ : SAP SE, together with its subsidiaries, operates as an enterprise application software company worldwide. SAP is one of the world's leading providers of software for managing business processes and develops solutions that facilitate effective data processing and the flow of information in companies. Their platform makes in-memory technology available to ERP (Enterprise Resource Planning) users so that huge amounts of data can be processed in real-time. In addition, new technologies such as artificial intelligence (AI) and machine learning can be integrated.

Infosys INFY 0.00%↑ : Infosys is a global leader in next-generation digital services and consulting. The company serves clients in financial services and insurance, life sciences and healthcare, manufacturing, retail, consumer packaged goods and logistics, hi-tech, communications, telecom OEM, media, energy, utilities, resources, services, and other industries.

Atlassian TEAM 0.00%↑ : Atlassian Corporation PLC produces software that helps teams work together more efficiently and effectively. The company provides project planning and management software, collaboration tools, and IT help desk solutions. The company operates in four segments: subscriptions, maintenance, perpetual license, and other (training, strategic consulting, and revenue from the Atlassian Marketplace app store).

Terminals and devices

Cisco Systems CSCO 0.00%↑ : Cisco Systems, Inc. is the world's largest hardware and software supplier within the networking solutions sector. The secure, agile networks business contains switching, routing, and wireless solutions. The hybrid work division has products for collaboration and contact center needs. The end-to-end security group has products spanning a variety of threat prevention necessities. The internet for the future division has routed optical networks, silicon, and optics. Optimized application experiences offer solutions such as full stack observability.

ABB ABB 0.00%↑ : ABB is a leading technology company that is vigorously driving the transformation of society and industry worldwide into a more productive and sustainable future. By combining its portfolio in electrification, robotics, automation and motion with software, ABB defines the boundaries of what is technologically possible. ABB looks back on a successful history of more than 130 years.

Qualcomm QCOM 0.00%↑ : Qualcomm develops and licenses wireless technology and designs chips for smartphones. The company's key patents revolve around CDMA and OFDMA technologies, which are standards in wireless communications that are the backbone of all 3G and 4G networks. The firm is a leader in 5G network technology as well. Qualcomm's IP is licensed by virtually all wireless device makers.

Conclusion

This is only a small excerpt of the companies involved in digital infrastructure. It would go beyond the scope of this newsletter to compile a complete list. Not to forget the big players like Google GOOGL 0.00%↑ , Apple $AAPL 0.00%↑ , and Amazon AMZN 0.00%↑. My point is rather that you expand your strategy in the search for stocks and start to think in layers. Everything you see around you has come into your hands through multiple layers. Multiple industries, multiple technologies, multiple companies. Sometimes you don’t need to think outside the box, but rather look closely at what’s inside the box. Every development, every trend, and every progress has companies that are profiting from it. And oftentimes you don’t need to hope that the newest software company will go through the roof, but rather find out which stocks enable this software company to exist in the first place.

Hope you learned something today.

Until the next issue. 👋