During his recent interview with Tobias, Marcelo Lima, managing member of Heller House, discusses cloud computing as the next big adoption curve, and the opportunities that it provides for investors. Here’s an excerpt from the interview:
Tobias Carlisle: So I love the description that you’ve given. How does it show up in your portfolio? What do you hold? A further question, how do you manage those positions? How many do you hold? How many do you trim when they grow? How do you look after the portfolio?
Marcelo Lima: Yeah, that’s a great question. So I really want to get to the trimming question because I think it’s a very interesting point. As you study these companies, you start seeing all these secular trends and secular trends are displayed in these technology adoption curves. So if you go back and look at the history of technology since the industrial revolution, every technology has had this adoption curve where everything from electricity to indoor plumbing, the automobile, dishwashers, the radio, T.V., internet, social media, et cetera. And it starts out obviously with zero penetration and then it goes how many households have the access to this product or service?
Marcelo Lima: And then you can see okay, well, what are the businesses that are taking advantage of this adoption curve and what are the businesses that have the wide moats or the growing moats that are riding this wave? And Apple is this canonical example, that we don’t own Apple by the way, but it’s a canonical example of a company that created the iPhone and it was a very successful new category, this computer in your pocket with the touch screen, et cetera. And it became this enormous adoption curve of more and more people around the world adopting this product. And so they rode that to become one of the world’s most valuable businesses. Right?
Marcelo Lima: Facebook, again, was social media, the adoption of social media around the world. So Google with Search and then Android. So where are we on these adoption curves today? What are the adoption curves of the future and how can we position ourselves to take advantage of that? That’s how I think about the portfolio. So one big adoption curve that I’m very excited about is cloud computing. So the analogy there very briefly is back in the day in during the industrial revolution, every factory people were electrifying. Electricity became a thing in the late 1800s. And people were electrifying their factories and replacing, let’s say water wheels or steam power with electricity.
Marcelo Lima: And it was very burdensome. You had to build your own power plant and you had your own engineers, and all that. And this entrepreneur, Sam Insull, came and said, “Look, I’ll build a centralized power station and I’ll run a wire to your factory. Now you can get rid of all this machinery and all your engineers, and all that.”
Well, that’s exactly what’s happening with cloud computing, right? It’s like get rid of all your servers and your database administrators, and all your… a lot of your IT folks dedicated to just maintaining this hardware. We’ll keep it all for you in the cloud in a central secure data center. And we’ll run a fiber optic cable to your office and we’ll give you incredible functionality through all these pieces of software, these APIs and all these things that we’re developing and constantly updating and patching.”
Marcelo Lima: And so that’s exploding. And every company around the world is in the process of moving to the cloud or is already on the cloud. And the largest one is Amazon Web Services. So those companies, Amazon Web Services, number one, Microsoft Azure, number two, and Google Cloud Platform, number three. I’m ignoring the Chinese clouds because, Alibaba and Tencent, because I have a hard time believing that they will be successful in the West. Like which chief technology officer is going to want to put data in a Chinese cloud? Unless you’re serving Chinese customers and you’re required to, I don’t think it’s going to be that big of a business.
Marcelo Lima: But so those companies are growing very fast. You can see the numbers. AWS discloses its sales and operating income, and then you have estimates of what the size of the market is. And so where are we on that adoption curve? So that’s very exciting. But then this is an enabling technology, right? The cloud enables new business models to be built on top of it. And of course, that’s software as a service. And so, what are the platforms being built on top of AWS and Azure, and Google Cloud? And that’s another layer that we’re looking at, obviously, to see these adoption curves taking place. So that’s a very big theme in the portfolio.
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