Marc Andreessen, the famed venture capitalist, coined a phrase several years ago: “Software is eating the world.”
In 2020, software’s appetite seems to have picked up.
The pandemic has sped up already extant tech trends, accelerating the adoption of some technologies by years in a matter of months. On top of that, technology stocks have been incredibly resilient in one of the worst economic environments the United States has ever seen.
Through the close of trading on May 19, the Dow Jones Industrial Average had taken a 15.2% year-to-date hit. The S&P 500 Index, considered an even better metric of how large U.S. corporations are faring, was off 9.5%.
The tech-heavy Nasdaq, for its part, in a year in which more than 36 million people filed for unemployment in just two months, was actually up 2.4%.
Here’s a quick look at how and why the pandemic has benefited the tech sector in 2020 — and, on the investing side, whether a longer-term, secular shift into tech stocks may be underway.
Perhaps the most striking quote out of Silicon Valley about the impact the virus has had on business came from Microsoft (ticker: MSFT) CEO Satya Nadella, whose 11-word commentary on recent quarterly results says it all:
“We’ve seen two years’ worth of digital transformation in two months,” Nadella wrote in the earnings report.
The clear catalysts of stay-at-home orders, forced business closures and quarantining have intuitively boosted demand for workplace collaboration software, communication services, online learning tools, telehealth, e-commerce platforms and delivery offerings, to name a few.
The highly visible stock market winners forced changes to workflow and consumer behavior and include video-conferencing stock Zoom ( ZM), e-commerce giant Amazon.com ( AMZN), online learning solutions platform Chegg ( CHGG) and telehealth company Teledoc ( TDOC), among many others.
It looks like 2020 will be a defining moment for many younger innovative tech-centric companies — and it’s not the first time that a virus has jump-started demand for certain services in what would be a defining way.
“Each major downturn — in this case, a pandemic — triggers a business model change in the impacted regions,” says Chao Cheng-Shorland, CEO and co-founder of ShelterZoom as well as DocuWalk, a blockchain-based virtual negotiating platform for facilitating contracts, documents and transactions securely.
“2003’s SARS outbreak accelerated the growth of companies like Alibaba. Without SARS, the maturity curve for online shopping in China would have taken much longer,” Cheng-Shorland says.
Today, Alibaba ( BABA) is one of the biggest companies in the world, worth about $600 billion.
While much of the onboarding to large addressable markets like e-commerce has happened already, other opportunities for digital services are still in the nascent stages of longer-term growth.
Matt Burns is the startup ecosystem leader at monday.com, a software-as-a-service workplace collaboration platform, with a valuation of around $2 billion. Among its 100,000 paying teams are Fortune 500 firms like Adobe ( ADBE), General Electric ( GE) and Walmart ( WMT).
“Remote work won’t be a niche anymore, it’s already the mainstream,” Burns says. “With large tech companies like Twitter already adopting it, those who can work from home will likely extend the offer to their employees as a way of showing they are future-minded.”
2020s Secular Shift into Tech Stocks
These trends are all fascinating. Case studies in rapid tech adoption, business model pivots and both supply and demand shocks are playing out in real time. For investors, the question is how long these trends will last — and how to reposition their portfolios for the brave new world.
Jonathan Curtis, portfolio manager at Franklin Templeton Investments, thinks that for many of these shifts in services and consumer behavior, the genie will be tough to put back in the bottle. He cites a litany of examples: the work-from-home environment, remote education, telehealth and contact-less delivery — these trends have legs.
“We think a lot of these tools that we’ve had to build will remain pretty relevant … some of these experiences are better,” Curtis says.
On top of that, tech stocks at large are still reasonably priced, Curtis says.
“When you look at tech relative to other sectors, it has some of the best growth over the last three years and we think it’s going to be relatively resilient through this crisis — and that there’s a potential for acceleration,” Curtis says.
“Relative to the S&P 500, tech is trading at only a modest premium — a 5% to 7% premium on a price-to-earnings basis — but you get really good growth and really good quality, so we don’t think you’re paying a big premium,” Curtis says.
He cites tech’s high EBITDA, or earnings before interest, taxes, depreciation and amortization, margins — a popular profitability metric — and great balance sheets that enable companies to heavily reinvest in their businesses or return capital to shareholders when other sectors can’t.
To be fair, Curtis says it’s not only Silicon Valley companies that are benefiting from the changes forced upon society in 2020. “Who’s done well?” he says. “Obviously, the big tech companies but also the companies that have invested in tech.” He mentions companies like Target ( TGT), Walmart and Nike ( NKE) — all businesses whose previous investments in technology have allowed them to serve customers in safe, convenient ways during the pandemic.
What Can Stop This Train?
As far as the outlook for tech stocks in the medium- and long-term, it’s tempting to think that investors are overreacting to tech’s resilience in 2020 and that outperformance can’t keep up.
But in the shorter term, industries like travel, leisure and events have shown their fragility. Department stores are disappearing, commercial real estate is in trouble, and the volatility of the energy sector as a whole has been on full display this year. Meanwhile, fixed-income yields today would be considered a joke in normal markets.
Where can investors in these fragile, unattractive or high-risk areas turn to? Tech, which has proven exactly how robust it is under the most extreme circumstances — and enjoys those high margins and attractive balance sheets — looks like a nice option.
Plus, Curtis sees one more long-term tailwind for tech stocks that should drive demand even when things start getting back to normal.
“We’re going to see an acceleration by the digital laggards in investing in tech and that’ll continue to drive fundamental outperformance,” Curtis says. The “adapt or die” mentality required in the natural world is also required in the world of commerce and free markets.
Andreessen once wrote: “We are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.”
Where are we now? News recently broke that the U.S. Department of Justice and multiple state attorneys general are reportedly moving to bring antitrust suits against Alphabet’s ( GOOG, GOOGL) Google, with other names likely to follow. Rumors that Amazon was in talks to buy movie theater chain AMC Entertainment ( AMC) also surfaced in recent weeks and were credible enough to send shares 30% higher.
It’s no longer a theory: in 2020, Andreessen’s technological and economic shift is happening. It’s one event that everyone can see, live.
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Tech Stocks: Is 2020 the Year Software Eats the World? originally appeared on usnews.com