AXA IM: The smaller-cap companies driving innovation in the digital economy

Jeremy Gleeson, Digital Economy Portfolio Manager

During the COVID-19 pandemic, most companies were faced with a variety of challenges – not least how to maintain their relationships with customers. Whether firms were migrating their workforce to a virtual environment, or revamping their websites and devising a clear strategy to cater to consumers’ shift from physical to online retail, one thing is clear: companies that did not embrace digital transformation were being left behind.

This has resulted in digital laggards increasingly investing in and adopting technologies to meaningful steps towards change, while other businesses have been doing the same to improve their online presence for their customers. Simultaneously, companies are emerging in this new digital age with products and services that tap into the latest consumer preferences.

The rise of smaller-cap companies in a post-COVID era

While there remains a degree of uncertainty over the long-term impact of the pandemic, we have observed a number of smaller-cap companies – publicly listed companies with a market value up to $25bn - that are not just surviving but are thriving in an increasingly digital economy. Below, we highlight a few key trends which some of these innovative firms have embraced:

• Use of digital marketing tools to attract customers

By the end of 2020, consumers spent $844bn online, a 42% increase from 2019. This trend has continued into 2021, with consumers having spent $541bn online between January and August, 9% more than the comparable period in 2020 and 58% more than the same period in 2019.¹

Search engines, online advertising and social media have therefore become increasingly powerful digital tools to attract, engage with and encourage customers to purchase products and services online. Global digital advertising spend (computers, mobile phone, tablets and internet-connected devices) overtook non-digital ad spending (television, print and radio) for the first time in 2019 and is forecast to reach $645bn in 2024 (versus $306bn for non-digital).²

This has led many companies to seek outside help with digital marketing, an area that requires a more specialist skillset compared to non-digital activity. For example, Sprout Social provides a single hub for social media publishing, analytics and engagement across all of its clients’ social profiles. One of its clients is TUI, a leading UK travel brand, which saw its number of messages received almost quadruple between February and March 2020, as concerns over travel restrictions grew. Using Sprout Smart Inbox allowed TUI’s customer services team to prioritise their inbox by tagging, filtering and hiding completed messages while monitoring engagement metrics. In three months, they were able to respond to over 500,000 customer queries with a remote team of 61.

HubSpot, a customer relationship management platform, also helps businesses to scale. Whether it is through blogs, YouTube content or an Instagram profile, HubSpot’s software effectively helps businesses to manage their marketing and sales operations.

• Demand for cybersecurity measures to protect businesses and their customers

As our professional and personal lives have become ever-connected through more online interactions, this has resulted in an elevated risk of cyberattacks, which will likely persist. Due to their connected supply chains and possessing large amounts of sensitive customer data, consumer goods companies can be particularly vulnerable. Investment in such security measures is essential for businesses determined to maintain consumer trust and, ultimately, their reputation.

Companies operating in this space include Darktrace, which provides enterprise-wide cyber defence protecting the cloud, email, internet of things, traditional networks, endpoints and industrial systems. The firm uses self-learning artificial intelligence (AI) technology, which means that, rather than using existing data to prevent a threat, it is learning ‘on the job’ from real-time data. Applied to cybersecurity, self-learning AI can identify and stop zero-day attacks, because it’s not learning from historical attack data.

Elsewhere, Rapid7 provides an array of data and analytics solutions to help its clients prevent attacks through visibility into vulnerabilities, detecting compromised or breached platforms and resolving the underlying causes of cyberattacks.

• Data & Enablers providing tools to help brands improve digital presence

Since the COVID-19 crisis, firms’ digital communication strategies have accelerated by an average of six years in order to meet the growing demand for online services.³ As such, one avenue through which businesses have found efficiencies in the digitalisation process is by engaging with third-party digital specialists, which we call Data & Enablers. Below are examples of some of these companies who provide the tools, engineering and expertise to enable the migration to digital channels, and support new firms in adopting a ‘digital-first’ strategy:

Five9, a provider of cloud contact centre software, recently partnered with Google Cloud to deliver a solution that enables their customers to deploy an intelligent virtual voice agent that can understand frequently asked coronavirus-related questions and provide answers specific to a firm’s operations – responses that can easily be updated depending on how the health crisis evolves.

New Relic is a software-as-a-service firm that focuses on performance and availability monitoring. Its tools provide real-time and historical insights into the performance and reliability of web and mobile applications.

Smaller companies driving innovation and growth

The digital evolution has not been an overnight coup. While some decisions were undoubtedly made in a hurried fashion in 2020 to ensure that businesses could remain operational, there continue to be many opportunities that we expect to develop over time as companies seek to put into place the systems and technology to enable business continuity as well as growth.

Corporate activity through companies entering public markets as well as mergers and acquisitions (M&A) has been dynamic in recent years. Darktrace listed on the FTSE 250 Index in April 2021⁴, while ProofPoint, an enterprise security company, was acquired in the same month by private equity firm Thoma Bravo, taking the business back into private ownership.⁵ Twilio, a cloud communications platform, has struck several deals over the past couple of years, the largest of which was its $3.2bn acquisition of Segment, a software provider that helps businesses track and manage customer data.⁶

Taken together, we believe these factors provide reasons for optimism around the long-term growth potential that small and medium-sized businesses can provide – whether as a means of spurring M&A activity from larger corporates, or by developing innovative solutions that cater to the latest consumer trends in an ever-growing digital economy. 

^Sources:

^{All stocks mentioned are for illustrative purposes only and should not be considered as advice or a recommendation for an investment strategy. All company information can be found on their websites and is accurate as at 30 September 2021.
(1) Adobe Digital Economy Index: eCommerce hits new milestone – Online prices continue to rise, Adobe, 15 September 2021
(2) How the pandemic changed worldwide ad spending, eMarketer, 17 May 2021
(3) COVID-19 Digital Engagement Report, Twilio, 15 July 2020
(4) London Stock Exchange welcomes Darktrace to the premium segment of the main market, London Stock Exchange, 30 April 2021
(5) Thoma Bravo completes acquisition of Proofpoint, Thoma Bravo, 31 August 2021
(6) Twilio acquires Segment, the market-leading customer data platform, Twilio, 2 November 2020}