In recent years, we have written extensively about the decentralization movement (see WILTW October 11, 2018). Centralized technologies have proven vulnerable to bad actors and ever-intensifying environmental disasters. Meanwhile, excessive corporate consolidation has been the key factor in the suppression of worker wages. Both regulators and technologists are now working to upend the centralized status quo. Decentralization is viewed as an essential path to a more resilient technological infrastructure, a more equitable distribution of wealth, a more vibrant entrepreneurial culture, and a more stable democracy.
Many of the decentralization movement’s key enabling technologies remain in their infancy. However, we have already applied the theme as a framework for recognizing outperformance potential, from cryptocurrencies and software-as-a-service to 3D printing, alternative energy, and green building. COVID-19 has only strengthened our near- and long-term investment case by highlighting key vulnerabilities of concentrated economic power while simultaneously accelerating the adoption of decentralizing technologies.
The rationales for decentralization are powerful. In his seminal 1996 book, Democracy’s Discontent, political philosopher Michael Sandel encapsulates Woodrow Wilson’s 1912 argument against centralized corporate power: “Restoring liberty meant restoring a decentralized economy that bred independent citizens and enabled local communities to be masters of their destiny rather than victims of economic forces beyond their control.” Wilson’s argument rings as true today as it did during the heyday of the great trusts. (see section 9)
The companies that lead the decentralization movement are likely to prove among the biggest winners of the next decade and beyond. And as with ESG (see WILTW February 20, 2020), we believe a theme-based approach will prove the best way to isolate outperformance opportunities.
As we explored previously, decentralization is an organizational architecture and not simply an ideal. While hardly nuanced, this diagram provides a basic shorthand to understand centralized versus decentralized versus distributed systems:
Cryptocurrencies are the most prominent example of decentralization. Bitcoin was invented as a rejection of the consolidation of the banking industry and the power exerted by central banks after the GFC. Our bullishness about bitcoin is rooted in the viral resonance of the currency’s decentralized message (see WILTW February 27, 2020). However, blockchain is only one of many decentralizing technologies currently taking hold. Consider these examples:
- In March, as COVID-19 ravaged Italy, a hospital in the Brescia area urgently needed respirator valves. A small local startup named Isinnova responded to the call for help, reverse engineering a 3D-printed version of the respirator part. Within two days, the company had delivered 100 valves to the hospital.
This anecdote is testament to the potential power of 3D printing to enable decentralized, point-of-demand manufacturing. COVID has surely highlighted the vulnerability of global supply chains. In the coming years, climate change will only intensify the need for adaptable local manufacturing. As McKinsey concluded in a report released in August about the supply-chain implications of ever-intensifying environmental disasters: “Averaging across industries, companies can now expect supply chain disruptions lasting a month or longer to occur every 3.7 years.”
- Comparing March 2019 to March 2020, telehealth claim lines in the U.S. saw volume increases of 4,347% nationally and more than 15,000% in pandemic hotspots like New York, according to FAIR health. Meanwhile, hospital visits fell by more than 32%.
This COVID-driven development harkens back to a bygone era. Seventy years ago, medical care was largely decentralized—house calls accounted for more than 40% of doctor-patient interactions in the 1940s. By the 1980s, that number had fallen to less than 1% as behemoth institutions emerged dominant. Today, there are roughly 6,000 hospitals nationwide and combined, they have more than 924,000 staffed beds. Telehealth could upend that centralized status quo, returning a significant percentage of doctor-patient interactions back to the home. And COVID has proven a springboard for that disruption.
In the coming weeks, we will be launching an official 13D decentralization index. For now, the following are key decentralizing technologies we are tracking and related companies with outperformance potential:
- Blockchain: Gartner estimates that blockchain will generate $3.1 trillion in business value by 2030. Long-term, the technology could prove the backbone of the decentralization movement. It could help transfer data ownership and profit-potential from behemoth platforms back to users and small- and medium-sized enterprises. It could prove essential to combatting the vulnerability of centralized-data storage. For now, most companies on the cutting edge are still in their startup infancy. Chip providers are likely to prove beneficiaries including Nvidia (NVDA, $558.15) and Xilinx (XLNX, $104.46). Of course, we also remain bullish on bitcoin as a key blockchain play. In WILTW February 6, 2020, we offered our recommendations for investing in bitcoin.
- Alternative Energy: The proliferation of localized solar and wind is both a proactive and reactive decentralization imperative in the fight against climate change. Hurricanes in Puerto Rico and wildfires in California have exposed the vulnerability of centralized energy grids. Localized wind and solar offer a decentralized solution. Some of our high-conviction recommendations include Enphase Energy (ENPH, $105.11), NextEra (NEE, $295.31), SolarEdge (SEDG, $292.47), and Enersys (ENS, $72.11).
- 3D Printing: Point-of-demand manufacturing could disrupt the business models of multinational behemoths and diffuse profit potential across the industrial and retail landscape. As mentioned last week, 3D printing is our top performing creative destruction sector year-to-date (see WILTW October 1, 2020). Proto Labs (PRLB, $142.41) and Materialise NV (MTLS, $41.56) are up 51% and 133%, respectively, since our February recommendation. We suggest accumulating positions on pullbacks. Dassault Systemes (DASTY, $181.67) is also worth consideration.
- Telehealth: Virtual health care could help improve the efficiency and effectiveness of medical care by decentralizing access to professionals. Key players include Teladoc (TDOC, $224.36), Amwell (AMWL, $35.95), and Cerner (CERN, $72.58).
- Software-as-a-service: Enterprises are poised to surpass consumers in total data generation as the IoT and 5G proliferate. The upside for SaaS companies will be enormous. As we’ve argued previously, opportunity will be far more diffuse than during the consumer-data-dominated era (see WILTW May 16, 2019). Our high-conviction recommendations include Autodesk (ADSK, $231.88), Workday (WDAY, $220.66), and Upland Software (UPLD, $41.69).