Opportunities in the Technology of our Social Distancing
Delwin Graham - Apr 16, 2020
. . . we are in no position to call the end of self-isolation protocols or the bottom of the stock market. But we believe that there are opportunities in the technologies that facilitate our social distancing . . .
2020 is proving to be an “interesting year” for investors. Coronavirus has taken hold of the market, building on previous fears of a toppy market. Valuations are tumbling and probably have not yet bottomed. Value will eventually surface – we expect that investors will eventually focus on balance sheets, dividend resilience, and the ability to make it to the other side. At the moment, however, we are experiencing an endless stream of dividend cuts, layoffs, and guidance revisions. There is no way to know how long the current headwinds will last. But on the positive side, interest rates remain low and government intervention appears to be fast and aggressive.
The present pandemic is a different kind of risk than we have seen in past downturns. In the case of the banking crisis of 2008, the collapse of Lehman Brothers threatened the world financial system by severely limiting the availability of credit. That was a financial crisis. COVID-19 poses a biological threat that has financial repercussions for the market. It hits demand because of government shelter-in-place orders, and it hits supply because factories and supply chains are shut down. Because the lifecycle of COVID-19 is a biological matter, we are in no position to call the end of self-isolation protocols or the bottom of the stock market. But we believe that there are opportunities in the technologies that facilitate our social distancing – that is, opportunities in companies with exposure to remote working, employee collaboration, online learning, communication infrastructure, network management and monitoring, and electronic consumer entertainment like video gaming and gambling. In many cases, the coronavirus crisis is accentuating long-term trends by driving demand. (Cf., Robert Young et al., Canadian Technology Review, Canaccord Genuity Capital Markets, April 6, 2020)
We need to work.
Restrictions on travel, gatherings, and non-essential interaction with other people are being used to stem the advance of COVID-19. But we still need to work. Technology plays an important role in enabling the cultural change to work remotely; that is, it provides the coordination, collaboration, and communication necessary to get things done. Employee collaboration tools are provided by Zoom (ZM: NASDAQ) and Microsoft/Skype (MSFT: NASDAQ). The original remote working app and virtual-desktop technology is Citrix (CTXS: NASDAQ). Dropbox (DBX: NASDAQ) and Slack (WORK: NYSE) are further examples of collaboration tools.
As companies become more comfortable with remote connectivity, issues of cybersecurity and network management and monitoring will become more important. Microsoft, Cisco/App Dynamics (CSCO: NASDAQ), and BlackBerry/Cylance (BB: TSX) are all active in these areas. We can also assume that IT services firms like CGI (GIB.A: TSX) and Accenture (ACN: NYSE) will benefit from the need to build large integrated systems.
While schools and universities are shut, companies will still need to train their employees. Online learning, like that provided by 2U (TWOU: NASDAQ), should be in heightened demand. Authentication software might be a lifesaver for deals waiting for a physical signature – DocuSign (DOCU: NASDAQ) is a provider. Another area of expansion should be digital payments, as we buy more online and because handing a paper bill to someone makes it hard to respect social distance. Lightspeed (LSPD: TSX) and Square (SQ: BYSE) are examples of strong players in this domain. Visa (V: NYSE) and Mastercard (MA: NYSE) are also well positioned.
We need to shop.
Given the need for social isolation, we can expect online purchasing to continue to gain traction and companies like Amazon (AMZN: NASDAQ) and Alibaba (BABA: NYSE) to benefit. Companies with established home delivery services should also have an advantage – Loblaw (L: TSX) and Walmart (WMT: NYSE) are examples.
We also need to entertain ourselves.
We can’t just work and shop at home. Streaming services like those offered by Netflix (NFLX: NASDAQ, Disney (DIS: NYSE) and Spotify (SPOT: NYSE) are probably essential to keeping everyone amused. Video gaming is also a big part of online entertainment; Activision (ATVI: NASDAQ) and EA (EA: NASDAQ) are big players in this field. Online gambling, like that provided by the Stars Group (TSGI: TSX), might provide a bit of adult distraction.
Weak infrastructure becomes more visible.
Of course, all of this connectivity puts pressure on the wireless and landline networks provided by Verizon (VZ: NYSE), BCE (BCE: TSX) and Telus (T: TSX). In fact, BCE reports that voice traffic on its networks has risen by 200 percent since the shelter-in-place orders were given and that they are adding additional fire-optic connections and servers to boost capacity (Cf., Alexandra Posadzki, Globe and Mail, April 9, 2020, p. B3). All of this is likely good for communications infrastructure providers like Cisco (CSCO: NASDAQ), Juniper (JNPR: NYSE), Nokia (NOK: NYSE), Ciena (CIEN: NYSE), and Ericsson (ERIC: NASDAQ).
A lot of cash, not a lot of debt.
Whereas the coronavirus crisis has pushed us into a recession, credit is hard to come by, and financing is a problem. One attractive feature of tech companies is that they are typically cash rich, which provides an operating cushion and the ability to remain competitive, particularly against legacy competitors with higher fixed costs. The largest US technology companies have incredibly strong balance sheets with ample cash to weather a storm. Apple, Google, Facebook, Microsoft, and Amazon have approx. US$570B in cash and approx. US$308B in debt amongst them, underscoring the strength of this generation’s “blue chip” investments. (Cf., Young et al., Technology Review)
It’s an ill wind that doesn’t blow somebody some good. For a few potentially profitable investment ideas, please contact me at email@example.com or 780-408-1518.