I've contemplated the effect of software adoption on stocks in general, and the quote below from Bill Priest sums up what I have been thinking. This story is not about technology stocks, it’s about the value-add that mainstream companies will access because they can now quickly adopt technological solutions. My blinkered view is motivated mainly by investing outcomes but also how my kids and their friends will be affected in the job market.
Stocks utilising technology are winning in the stock market
A paragraph from Bill Priest of Epoch Investment Partners. (Epoch focuses on the generation and reinvestment of free cash flow, which gives them a unique perspective into how technology is changing the way corporations operate thanks to new solutions and processes.)
"The use of technology directly impacts a company’s profitability. Consider its impact on the calculation of a company’s return on equity. ROE is the product of three variables—profit margin, asset utilization, and leverage. To the extent that you can substitute technology for labor, your profit margin will rise, even if your revenue is flat. If you can substitute technology for assets (bricks and mortar), asset utilization will rise.
The third component of this calculation, leverage, is measured by dividing the company’s total assets by shareholder equity. If you don’t need as many assets to run a business, you can return excess capital to the shareholder by buying back shares, raising the cash dividend, paying down debt. In other words, the payout ratio can rise. Companies don’t need as much capital today because they have embraced technology. If you can find industries applying technology in this way, they will continue to grow, regardless of what happens with interest rates."
The end result for us as punters is that using technology as a macro input is a good way of thinking about valuations and prospects for a company's future or share price.