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Investors who want to make sense of today’s hyperactive stock markets should turn off the financial news and ponder what fossils can tell us. One of their key messages is that change is not a smooth process, according to Kirsty Gibson, joint manager of the Baillie Gifford US Growth Trust. “Just as certain events seem to set off bursts of evolution in the natural world, so the pandemic has accelerated disruption in the business world,” she says.
She points to the notion of “punctuated equilibrium” – a theory that proposes evolution proceeds in jerks. The punctuationists suggest long periods of relative calm in the natural world are interrupted by rare upheavals in which species spring into being and displace yesterday’s champions.
Something similar seems to happen in business. For years, a handful of companies dominate a given niche. Challengers may gain strength in the background, but it requires a shock – like a technology shift or a regulatory crackdown or, yes, a pandemic – to give these upstarts the chance they need.
Once that happens, old hierarchies crumble. The advertising industry provides a fine example. For decades, marketeers poured money into network TV. In the case of the most highly-watched events, such as the Super Bowl, advertisers bid months ahead for prime ad spots.
This approach was riddled with inefficiencies. Advertisers had to commit far ahead of time. They were forced to bid to reach a large number of viewers, not necessarily the individuals most interested in their products.
Enter Covid-19. Locked-down consumers could no longer watch many of their favourite sports events or new episodes of shows on network TV. Instead, they flocked to streaming services such as Netflix, Disney Plus, and Roku, as well as to social media, apps, and specialised websites. The surge of viewers provided a bounty of advertising opportunities, not to mention a gusher of data on the interests of individual consumers.
Among the beneficiaries has been The Trade Desk, a media-buying company that allows advertisers to purchase digital ad spots across social media, TV, and websites. The company uses data that targets individual viewers. Even better, the service operates in real time, scanning millions of available ad spots and auctioning them.
Its pricing has the potential to transform the traditional buying dynamic. Consider an ad spot in a Super Bowl overtime period. Under the buy-ahead system, such a spot would be regarded as an afterthought because no one could predict months ahead if the game would go into extra time. But, with The Trade Desk, an ad spot during that period would go up for sale as the drama unfolded on the field. Advertisers could bid on the spots knowing just how intently they would be watched, and by whom: The Trade Desk’s database allows companies to seek out and sell to the precise target audience for the advertised product. “Trade Desk allows for more efficient pricing of these spots because it gives advertisers a way to see the potential return in real time,” Gibson says.
The company is among several investments in the US Growth Trust on the right side of pandemic-accelerated behavioural shifts. Wayfair is an online furniture retailer that worked for years to convince consumers to buy home furnishings from a website instead of a physical store. Lockdowns forced consumers to find new ways to shop; Wayfair’s sales soared as people flocked online. Initially, the new shoppers focused on home office gear, but their buying soon spread into other categories.
“Once people got over the initial hurdle of going online to shop for furniture, they began to appreciate the convenience, and realised they enjoyed the experience and trusted the process,” says Gibson.
Another beneficiary of the pandemic is Pinterest, the social media site that allows users to pin images of intriguing products, food, and fashion to personal online boards. US Growth Trust invested in the company in early 2020 when it became clear the site offered insights into what consumers were thinking.
“Pinterest is the shop window of the internet,” Gibson says. “It allows retailers to see trends and gather data on what people are planning to buy, or at least considering.”
She sees it as an example of how the pandemic has accelerated transitions that were already underway. “All the themes we think are inevitable over the next five to ten years have gone into high gear,” she says.
The key for an investor, Gibson says, is putting up with the herky-jerky nature of this evolution. “Progress may be faster or slower at some points than you expect,” she says. “But we think certain structural changes, like many of the ones we have seen brought forward over the past year and a half, are inevitable. That change is fundamentally what we are investing in.”
Words by Ian McGugan
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The views expressed in this article should not be considered as advice or a recommendation to buy, sell or hold a particular investment. The article contains information and opinion on investments that does not constitute independent investment research, and is therefore not subject to the protections afforded to independent research.
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