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Instagram Chief Executive Officer and co-founder Kevin Systrom announces the launch of a new service named Instagram Direct in New York December 12, 2013. (Lucas Jackson/Reuters)

Instagram Chief Executive Officer and co-founder Kevin Systrom announces the launch of a new service named Instagram Direct in New York December 12, 2013.

(Lucas Jackson/Reuters)

STRATEGY LAB

Tech stocks: The big winners ... and the likely losers Add to ...

Chris Umiastowski is the growth investor for Globe Investor’s Strategy Lab. Follow his contributions here and view his model portfolio here.

I recently enjoyed watching a brilliant presentation that aligned very well with how I approach investing. The 23-minute talk, called “Winners and Losers in a Digital Age,” was given by NYU marketing professor Scott Galloway at an industry conference, but it’s fitting that I watched a recording of it that was posted on YouTube.

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Mr. Galloway points out that average GDP growth is only 2 per cent, so for all the companies that are growing faster than this, there must be other companies that are shrinking. His comments about the social media and retail sectors were highly relevant to anyone who, like me, enjoys investing in companies that are winning by disrupting important markets over the long term.

I was most surprised by his prediction that Instagram will become the most significant social media platform in the world within 24 months. If I let my own social media habits rule my investment decision-making process, I might dismiss his claim as absurd. I don’t use Instagram. But over 200 million people do, and my previously uninformed opinion has been clearly trumped by Mr. Galloway’s research showing that Instagram is the fastest-growing social media site in the world. He also points out that it has incredible engagement rates among its users. Facebook Inc. bought Instagram about two years ago. As a Facebook shareholder (both in my Strategy Lab portfolio and personally), I’m encouraged by this.

Who’s losing to Instagram? Let’s put it this way: Don’t expect an IPO from Pinterest anytime soon. Mr. Galloway thinks this younger photo-sharing site is getting crushed by Instagram. But what surprised me was his prediction that Twitter Inc. would be a loser in this digital battle. He suggests that Twitter has been “trying to go visual” but it’s taking them too long and they’re beginning to suffer as a result. Mr. Galloway offers solid evidence of this, too. Among the 5,000 brands tracked by his brand-strategy firm, L2, the Web traffic they receive from Twitter is a tiny fraction of traffic coming from YouTube or Facebook. Mr. Galloway also pointed to a study by IBM, which tracks 100 e-commerce sites, and apparently found no meaningful conversion of Twitter traffic into actual revenue during the largest U.S. online shipping day of the year, Black Friday.

In my last Strategy Lab column discussing Twitter, I felt the stock was too expensive, but it was a solid long-term business. Mr. Galloway’s presentation has me rethinking what has to happen to make Twitter a worthwhile stock. If traffic referrals from the mobile app don’t help a business make more sales, it will be incredibly hard for the firm to generate the kind of advertising revenue that Facebook and Google Inc. bring in.

In the retail sector, Mr. Galloway argued that Amazon.com Inc. is a big winner at the expense of brands that have weak digital strategies, such as Target. He offered what might be the best metaphor I’ve ever heard to explain what Amazon is doing by building gigantic fulfilment centres outside of urban areas. He suggests that while the cable company is your conduit for digital bits (think cable modem service), Amazon’s fulfilment business is set to become your conduit for atoms (physical stuff). Because Amazon spends so much money on technology and fulfilment, Mr. Galloway says it’s like they’ve gone underwater with a huge oxygen tank and forced their competitors, who have much smaller oxygen tanks, to dive down too. He calmly predicts that the weaker players will run out of air and drown.

Mr. Galloway makes one other incredibly powerful argument in favour of Amazon. He says they’ve got the lowest cost of capital of any other company in history, and has avoided getting Wall Street hooked on “the crack cocaine of profit.” Instead they’ve been successful in selling investors on a big vision that he refers to as “a steady dose of methadone.” The result? Amazon has an incredible opportunity to continue reshaping the future of the retail industry and come out a huge winner.

When it comes to investing research, I’d much rather spend my time watching energetic and informative presentations from guys like Mr. Galloway who focus on long term trends as opposed to reading Wall Street earnings reports that unnecessarily focus on the short-term minutiae. Mr. Galloway’s presentation reinforces my decision to own Facebook, Google and Amazon while also challenging my thoughts around adding a position in Twitter.

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