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Uber, Airbnb, Meta Platforms, and Alphabet, are the names of popular companies that have gained leadership within their respective industries, but all possess one common trait, they are asset-light businesses. An asset-light strategy or business model involves transferring capabilities, such as people, process, and technology, to “better owners” to enable companies to transition fixed costs to a variable cost structure, enhance agility, and facilitate a shift of resources that allows a focus on core capabilities.

In this piece, we'll delve into the asset-light business model and explore why companies embracing this strategy may experience superior total shareholder returns. Finally, we'll spotlight ETFs that either include asset-light companies in their portfolio or prioritize an asset-light approach.

A changing business landscape

Entering the post-industrial economy, companies within major developed economies began to invest more in intangible assets, like design, branding, R&D, and software, as traditional businesses often tied up substantial capital in acquiring and maintaining physical assets, which restricted their financial flexibility. The shift towards asset-light business models resulted in lower capital expenditures, which in turn allowed firms to achieve higher returns on invested capital (ROIC) and enhance shareholder value over the long term.

Asset-light business models provide companies with specific capabilities that allow them to succeed, these capabilities are defined below:

Flexibility & Agility

Asset-light businesses are characterized by their ability to rapidly adapt to changing market conditions. By minimizing investments in physical assets such as manufacturing plants, warehouses, or fleets of vehicles, these companies can swiftly reallocate resources as needed. This flexibility enables them to seize emerging opportunities, respond to competitive threats, and navigate economic uncertainties more effectively than their asset-heavy counterparts.

Meta Platforms has showcased this attribute numerous times with their product offerings, launching Instagram Stories to compete with Snapchat; while the launch of Instagram Reels was done to compete with TikTok. The ability to quickly bring these products to market to compete with emerging social media platforms is indicative of the firm's deftness and flexibility.

Scalability and Rapid Growth

Asset-light models are inherently scalable, enabling businesses to expand their operations quickly and cost-effectively. Without the burden of heavy infrastructure, these companies can enter new markets, launch new products, or scale up existing operations with minimal friction. This scalability is particularly advantageous in industries characterized by rapid technological advancements or evolving customer preferences, where the ability to grow or pivot swiftly can determine a company's success.

Airbnb and Uber reflect this attribute within their business models, as they are a platform that allows individuals to monetize their fungible assets (i.e. houses, cars, etc.). The companies have no ownership of the assets end users utilize but have built their success on the creation of a platform that is scalable by entering new geographic jurisdictions anywhere in the world.

Focus on Core Competencies

By outsourcing non-core functions and leveraging third-party expertise, asset-light businesses can concentrate their efforts and resources on activities that drive the most value. This strategic focus allows them to excel in their core competencies, whether it's product innovation, marketing, customer service, or distribution. Moreover, by partnering with specialized vendors or service providers, asset-light companies can access best-in-class capabilities without the need for large internal investments, further enhancing their competitive advantage.

As a surprise to many, NVIDIA is a firm that exemplifies this capability. The semiconductor behemoth focuses on designing chips for either specific or general product usage, however, the firm outsources the manufacturing to third-party foundries. To learn more about the semiconductor value chain, click here to read a previous article on the semiconductor industry.

Risk Mitigation

Asset-heavy businesses face significant risks associated with asset depreciation, technological obsolescence, regulatory changes, and market fluctuations. In contrast, asset-light companies are less vulnerable to these risks since they rely on leased or outsourced assets that can be easily adjusted or terminated based on evolving market conditions. This risk mitigation strategy provides greater resilience and stability, enabling asset-light businesses to weather economic downturns and navigate industry disruptions more effectively.

Microsoft’s partnership with Open AI is an example of this capability. While various firms have announced their AI-building initiatives, Microsoft has benefited from the work already done by OpenAI – without them having to build it themselves, and potentially delivering an inferior product. The firm has integrated much of Open AI’s work into existing product offerings, such as Microsoft’s operating system and suite of business productivity applications.

Investing in asset-light businesses

As evidenced from the examples stated previously, many technology/software-focused firms are asset-light businesses, as such, investment solutions such as RBC Global Technology Fund (Ticker: RTEC) or TD Global Technology Leaders ETF (Ticker: TEC) will provide broad exposure to technology firms.

If investors desire a more thematic focus towards their asset-light investment solutions, cyber-security firms are a strong area of consideration. In an ever-growing digital economy, cybersecurity has become paramount for businesses of all sizes, with the services offered by these companies leveraging cutting-edge tools, artificial intelligence, and machine learning algorithms to identify and mitigate threats in real time. For investors considering investment solutions with a primary cybersecurity focus, the Horizons GX Cybersecurity Index ETF (Ticker: HBUG) seeks investment results that correspond generally to the performance of the Indxx Cybersecurity Index; which provides global exposure, to publicly-listed companies that stand to potentially benefit from the increased adoption of cybersecurity technology, such as those whose principal business is generally engaged in the development and management of security protocols preventing intrusion and attacks to systems, networks, applications, computers, and mobile devices.

Please note this article is for information purposes only and does not in any way constitute investment advice. It is essential that you seek advice from a registered financial professional prior to making any investment decision.