Whilst the constituent companies of the Global Leaders portfolio are, for the most part, well established, they are also masters of adaption.

Adaption can often be regarded as a series of defensive measures to address competition but it is as easily understood, in the context of companies that outperform endemic growth rates, as grasping new and developing opportunities.

In this Deep Dive series we identify developing growth vectors for companies in the portfolio. We define growth vectors as elements of each companies’ business that will generate super-normal (that is above the endemic growth rate of a sector) for at least the next 10 years.

Until recently, the Microsoft investment case has been powered by Azure, its cloud behemoth. Beneath the surface however, another juggernaut has been quietly amassing scale. Cyber security is now a US$20bn business, roughly 10% of the group. Two years ago, it barely got a mention in quarterly results. Business momentum has been impressive with growth running at 30% per annum, three times that of the group. We think it likely security cements a position as a core pillar of future growth.

Satya Nadella, Microsoft’s CEO, argues that all companies will become digital companies, underpinned by a distributed computing fabric. As this digitalisation plays out cyber security is becoming increasingly mission critical.

Microsoft’s use case for the customer is compelling and revolves around simplicity. It contends that choosing a bundled security option with Microsoft could save a company 60% compared to multiple individual licences from specialist competitors. This benefits the budget but also reduces complexity, a proxy for risk the world of cyber security. This proposition is possible in part due to Microsoft’s unique position through the computing stack, from infrastructure to software. It is also, clearly, a benefit of scale.

There is still a joker for Microsoft to play: OpenAI. Microsoft’s canny investment has rapidly established it amongst the industry elite. AI may be far from the finishing post when it comes to affecting our daily lives but it lays up well for sharpening the effectiveness
of cyber security products. The market is also pushing companies up the technology ladder. Cyber security insurance providers are requiring more advanced threat intelligence to issue policies. Integrating AI into its security suite would embed Microsoft as an industry leader and significantly raise the bar for the competition.

Microsoft’s breadth allows for innovative businesses to be internally seeded and gain rapid scale. It is unlikely we will be able to predict ahead of time where the next vector for growth will come from. However, this speaks to how we think about the opportunity in companies. We want to own businesses with an innovative culture and a management team with the skill set to execute on opportunities that present themselves. We do not need to predict the future but own companies where multiple futures are embedded.

This Journal is taken from the Cerno Global Leaders Investment Report – Q1 2023, which can be read in full here.

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