2 megatrends to get behind in 2023

Keep an eye on the rise of cloud platforms and connected TV.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

One of the best ways to find success in the stock market is by investing within trends. Long-term megatrends in technology and other sectors have the ability to reshape the economy and create big market winners.

For example, trending sectors like e-commerce, cloud computing, and video streaming led to massive returns in several stocks over the last decade, even with the challenges in the tech sector in the last year. 

While 2023 is potentially shaping up to be a tough year for stocks as most economists expect a recession, that doesn't mean that there won't be any winners.

To find great investments, it's a smart idea to see what's trending right now. Here are two of the biggest megatrends for 2023 and beyond.

1. Platforms vs. point solutions

Behind the scenes, one of the biggest trends in technology is that enterprises are replacing multiple "point solutions" with a single cloud platform.

A point solution is an application that solves a single problem, like accepting payments, authenticating users, or monitoring outages. A platform, on the other hand, gives IT managers a single interface to manage multiple functions, including those provided by individual point solutions.

According to tech research firm Gartner, by 2024, 60% of organizations will have switched from using point solutions to platforms, up from 20% today. As a result, many of the fastest-growing software companies today have positioned themselves as platforms. 

Take GitLab (NASDAQ: GTLB), for example. The company provides a single software platform used to manage DevOps, or the systems through which companies develop and deploy software.

GitLab is growing rapidly, in part because it's grabbing market share from point solutions. Its revenue jumped 74% in the second quarter to $101 million, and it has a large growth opportunity ahead of it from this megatrend, as 85% of its customers are still using two to 10 DevOps point solutions.

Another example is Okta (NASDAQ: OKTA), a leader in cloud identity software. Okta's cloud identity platform integrates with more than 7,000 applications and provides a suite of identity tools including single sign-on and multifactor authentication, so businesses can ensure their customers and employees can log on seamlessly and securely. FedEx is one of many companies that have used Okta's Identity Cloud to replace ad hoc legacy point solutions. In its second quarter, Okta's revenue jumped 43% to $452 million.

Finally, Bill.com (NYSE: BILL) has established itself as an automated end-to-end payments platform for small and medium-sized businesses. It's grown both organically and through acquisitions and helps businesses automate payables, credit card expenses, receivables, and more. Bill.com integrates with accounting software tools and in some cases replaces manual bookkeeping or data entry for its customers. Top-line growth has been strong, with revenue up 94% to $229.9 million.

2. Connected TV

In-home entertainment, the transition from traditional pay TV to video streaming defined the 2010s. This decade, the trend that's shaping up to define it is connected TV, or ad-driven streaming.

With video streaming rapidly replacing linear TV, advertisers are starting to shift ad budgets, and some of the biggest streaming platforms, like Netflix and Disney+, are responding by launching their own ad-based streaming tiers.

Commenting on the decision to launch the ad tier and the audience shift to video streaming, Netflix co-CEO Reed Hastings said on the company's recent earnings call:

What I underappreciated was just the impact on advertisers. They're just being able to reach fewer people. And then the 18-to-49 demographic is even faster than the decline in pay TV. So, this is what is really fueling the cycle is that really collapsed linear TV as an advertising vehicle outside of a few properties like sports.

As eyeballs have shifted to streaming, advertisers naturally want to follow, and that will get easier for them with the Disney+ and Netflix ad tiers. Advertisers also love the connected TV model because it offers both the large-screen, engrossing medium of video with the targeting and tracking of digital channels like social. 

Connected TV is already a fast-growing business for a number of adtech companies, and it could explode next year as Netflix and Disney join the fray.

One such winner of this switch looks to be Roku (NASDAQ: ROKU), the leading streaming platform in the U.S. Though Roku may best be known for its branded dongles that enable streaming, the company makes most of its money through an ad revenue share arrangement with streaming services on its platform. Typically, Roku retains 30% of the ad inventory from its streaming partners and keeps all the revenue it makes from those ads.

Though Roku's revenue growth slowed because of a cyclical decline in ad spending, the growth of the connected TV ecosystem bodes well for it over the long term.

Another company that looks poised to capitalize on the growth of CTV is Magnite (NASDAQ: MGNI), a supply-side adtech platform that rearranged its business to prioritize CTV. In its most recent quarter, CTV revenue rose 29% year over year and now makes up 44% of its revenue, excluding traffic acquisition costs.

The leading demand-side ad tech platform, The Trade Desk (NASDAQ: TTD), also seems well positioned to take advantage of the growth in CTV. Though it doesn't break out CTV revenue, CEO Jeff Green said in the third-quarter results that the CTV market is rapidly growing and is one reason why the company delivered 31% year-over-year revenue growth to $395 million.

Megatrends are worth keeping an eye on

With the rise of these megatrends, there are plenty of ways to profit, and both the transition from point solutions to platforms and the evolution of connected TV look poised to transform their respective industries over the coming years. Companies riding these trends, such as the companies mentioned, are worth keeping an eye on, as they look well-positioned to outperform the market.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Jeremy Bowman has positions in Bill.com Holdings, Inc., Magnite, Inc, Netflix, Okta, Roku, The Trade Desk, and Walt Disney. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Bill.com, FedEx, Magnite, Netflix, Okta, Roku, Trade Desk, and Walt Disney. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Gartner and has recommended the following options: long January 2024 $145 calls on Walt Disney and short January 2024 $155 calls on Walt Disney. The Motley Fool Australia has recommended Netflix, Okta, Trade Desk, and Walt Disney. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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