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09 Aug 2021 - A Massively Underestimated Trillion Dollar Market?
By: Amit Nath, Montaka Global Investments

A Massively Underestimated Trillion Dollar Market?

Amit Nath, Montaka Global Investments

July 2021

Humans are linear by nature and our ability to grasp exponential change is extremely poor, this creates a blind-spot when it comes to assessing the potential of technology. While the cloud opportunity is already thought of in the trillions of dollars, it may actually become three to six times this size over the coming decade.

One of the most difficult things to do as an investor is delineating promotional rhetoric from a genuine glimpse of an explosive new secular trend. Separating the so-called "signal and noise" is less clear-cut than the phrase implies. For instance, the parabolic moves (up and down) in AMC and GameStop (both were recently considered bankruptcy candidates), clearly highlight how one investor's signal can be another investor's noise, with the market as polarized on the future of the businesses as oil and water.

Interestingly, often the loudest debates about a company's future are highly bifurcated like AMC and GameStop, with the opportunity worth many multiples of what the market implies today or nothing at all (similar debates were had over Amazon and Tesla too). Hence it is quite an unusual situation when the debate is not between success and failure, but rather success and unfathomable success! Paradoxically such a situation may be available at one of the largest companies in the world, with a market cap approaching US$2 trillion, Microsoft's opportunity may actually be underestimated by the market.

Before we dig into this frightening proposition, that such a "large company" has a potentially larger opportunity than we can comprehend, let's revisit some of the perspectives from Google's world-renowned futurist and Director of Engineering, Raymond Kurzweil. Famous for advancing numerous cutting edge fields, Kurzweil posits that humans are linear by nature, whereas technology is exponential. In fact human ability to grasp exponential change is so poor that even when it is presented in the plain language of mathematics, our minds often short-circuit and struggle to resolve situations that are indisputably true. For example, Kurzweil's "law of exponential doubling" notes that it takes seven doublings to go from 0.01% to 1% and then seven more doublings to go from 1% to 100%. So within 14 moves we have gone from something that is completely invisible in the linear world (0.01%), to entirely encompassing it (100%). Perhaps the global pandemic and the exponential spread of the virus has given us a real-world look at what exponential growth "feels", like given the speed with which our lives were disrupted, however, most humans are simply not built to intuitively reconcile this phenomenon.

Shifting back to Microsoft, it is generally accepted that the biggest opportunity ahead of the company continues to be cloud computing and its powerful claim on the growth of technology more broadly, driven by its privileged position with enterprises and consumers. It has also become somewhat of a consensus view that the cloud market will be over US$1 trillion within a decade, this alone puts Microsoft in exceptional shape to deliver multiples of its stock price for shareholders over that time. So case closed right, what more is there to say? So what would it mean if the consensus view was wrong and massively underestimated the opportunity. Many will raise their eyebrows and ask "how can that be, the opportunity is already over US$1 trillion", which is actually the natural default for our linearly predisposed human minds.

Perhaps thinking exponentially, a signal of how large the cloud opportunity may be, came on a recent Microsoft earnings call, during which CEO Satya Nadella made the following comment regarding the future of global technology spending:

"At the highest of levels, today as a percentage of GDP tech spend is 5%. We think it will double in the next 10 years, and if anything, this pandemic perhaps has accelerated that doubling…[and] what is the largest, most secular need? It is the need for distributed cloud infrastructure" - Satya Nadella (CEO of Microsoft)

At first blush, this comment looks trivial, but putting some numbers around it reveals quite an interesting result. Current global IT spend is ~$3.6 trillion (of which cloud is only ~10%), were it to double as a percentage of global GDP (which is also growing) over the coming decade, it would imply global IT spending would hit $9.6 trillion from current levels (~10% CAGR ). Given Nadella noted the pandemic had "accelerated that doubling" it would imply faster growth for cloud relative to pre-pandemic levels, which was already growing more than ten times (10x) faster than the industry. Hence if Nadella is right, the market may be ~US$6 trillion by 2030 or six times (6x) the size consensus perceives it to be now. Even if Nadella is wrong and there has NOT been an acceleration, the cloud opportunity would still be ~US$3 trillion or triple (3x) the market consensus. A truly staggering thought for the potential of this explosive, exponential secular trend!

At Montaka Global we have a single clear goal: to maximize the probability of achieving multi-decade compounding of our clients' wealth alongside our own by owning the long-term winners in attractive markets, while they remain undervalued.

Montaka owns shares in Microsoft.

Amit Nath is a Senior Research Analyst with Montaka Global Investments. 

Funds operated by this manager:

Montaka Global Fund, Montaka Global Long Only Fund

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