How Covid Is Driving A Decade's Worth Of Tech Growth In Two Years

Fear of the virus and quarantine-enhanced tech dependency are overcoming the usual consumer resistance to new products and services.

In addition, big tech companies see an opportunity to further consolidate their domination - and profit margins - by moving quickly into innovative lines of business that reinforce their strengths. JL

James Phillipps reports in Forbes:

Covid-19 is turbocharging the pace of change so new technology that was forecast to take over a decade to become mainstream, is now expected to be adopted in just a couple of years. Development and product cycles usually take years to overcome consumers’ natural skepticism and inertia before they go mainstream. That was until coronavirus swept away many of the barriers to their quicker adoption. “Covid-19, with its enforced and abrupt change in behaviors, is a removal of a bottleneck and an openness towards new and better ways of doing things,”

Covid-19 is turbocharging the pace of change so new technology that was forecast to take over a decade to become mainstream, is now expected to be adopted in just a couple of years.

This is the view of Baillie Gifford, which is Tesla TSLA’s third-largest shareholder and was an early backer of Amazon AMZN. The Scottish fund manager aims high and also recently bought stakes in two flying taxi companies.

It views the coronavirus crisis as a real game-changer.

At its peak in April, the pandemic resulted in an estimated 3 billion people worldwide being in lockdown. This meant businesses and consumers had little choice but to use online services. Savvy companies pumped money into their digital operations, refining their services and building capacity as some notably buckled initially under the new weight of demand.

Microsoft MSFT CEO Satya Nadella said in April that “we’ve seen two years’ worth of digital transformation in two months”. Development and product cycles usually take years to overcome consumers’ natural skepticism and inertia before they go mainstream. That was until coronavirus swept away many of the barriers to their quicker adoption.

“Covid-19, with its enforced and abrupt change in behaviors, is a removal of a bottleneck and an openness towards new and better ways of doing things,” said Baillie Gifford investment manager Douglas Brodie, in an update to investors in its Edinburgh Worldwide investment trust this week.

“Accordingly, we view a significant outcome of the current crisis as being an acceleration in the underlying rate of change occurring in the world. In business and commerce, this is likely to be expressed through a quickening in the ascendancy of digital platforms and innovative, nimble disruptors. This will be matched by a hastening in the demise of stale, structurally-challenged, frequently-indebted incumbents.”

This will see the strong companies getting stronger, a common feature of major economic downturns, but Brodie believes this trend will be far more pronounced over the coming years.

“Covid-19 is likely to be the catalyst to a massive digitally-powered landgrab with the winners anointed over the next two to three years versus what might have ordinarily taken 10+ years,” he said.

“Such an acceleration will significantly limit the number of players that could feasibly enter these markets and will ensure that the spoils accrue to a smaller number of existing participants.” 

The FAANGs aren't long in the tooth yet

The so-called FAANG stocks (Facebook, Amazon, Apple AAPL, Netfli NFLXx, and Google GOOGL parent Alphabet) have been able to reinforce their market dominance throughout the lockdown. Netflix more than doubled its forecast new subscribers in the first quarter, signing up nearly 16 million. Microsoft’s revenue surged to an expectation-beating $35 billion, while Amazon saw sales rise 26% to $75.5 billion, even if costs rose quicker.

This has also been reflected in their share price performance. The FAANGs have rallied by between 39.9% and 56.6% off their March lows, with each ahead of the S&P 500’s 35.9% rise. 

All but Alphabet have also posted new record highs in the process. This is the problem for investors now. Those already on-board can enjoy the ride, but late-comers have to decide whether they are comfortable buying in at near-record prices.

Tim Gregory, who manages the Vermeer Global Equity fund, already held Microsoft and Apple going into the coronavirus crisis. He bit the bullet and added Amazon in late March, believing its retailing, cloud, and Prime businesses would see huge demand spikes during the lockdown.

“We had to take a deep breath, but you have to be prepared to say we’ll still buy this, even if the stock has gone up,” he said. “We felt it was in a really strong position and it’s performed tremendously.”

For other investors, the post-March rally in the FAANGs has served to reinforce how disconnected their valuations have become from the wider market.

Fidelity Global Special Situations fund manager Jeremy Podger, despite owning Microsoft, Apple, Alphabet, and Amazon, warned in May that their growth has been “exponential” over the last three months. He fears investors have blind faith that “they can’t help but go up, but that’s clearly not the case”.

Others have been more scathing. SocGen strategist Andrew Edwards last month branded the FAANGS “extremely” overbought in a note to investors.

“It is shocking quite how reliant the US equity market has become on just six mega-cap stocks because it emphasizes the risks if, for any reason, the bubble in the FAAANM (the FAANGs plus Microsoft) stocks burst as I believe it surely will,” he wrote.

Finding the next FAANGs

Finding the next FAANG is where the biggest gains can be made.

Brodie said his team recently bought stakes in five listed stocks they believe can become those “nimble disruptors”, through their Edinburgh Worldwide investment trust.

They are a diverse range of businesses and include EverQuote, a US insurance comparison website, Chinese gaming platform Huya, and LiveRamp, a San Francisco-based software firm “we are excited by” that “helps brands connect with consumers”.

The other two additions were American medical technology companies Tabula Rasa and Shockwave Medical.

Baillie Gifford also last week invested in Lilium, a German electric aviation business that aims to bring a five-seater flying taxi to market by 2025. This was through the asset manager’s flagship Scottish Mortgage investment trust. The $13 billion investment company, managed by James Anderson, also owns a stake in Lilium’s Toyota-backed rival Joby, which raised $590 million in January to help fund the development of of a commercial air shuttle.