Saturday, April 11, 2020

Tech Is Going Even More Viral

Anyone who wasn’t a tech addict before the Great Virus Crisis (GVC) turned our lives upside down certainly is now. For many of us, working from home has only emphasized our need for fast wireless connections to the cloud. Cocktails and conference calls via Zoom have helped us connect despite the separation. And Netflix and video-gaming systems have kept the whole family entertained. Technology has become a GVC staple, right up there with food and toilet paper.

The tech names helping us during this time of social distancing are scattered primarily throughout the S&P 500 Information Technology and Communication Services sectors. Both sectors are leaders in the performance derby among S&P 500 sectors ytd through Tuesday’s close: Information Technology (-9.4%), Consumer Staples (-9.7), Health Care (-11.2), Utilities (-14.7), Communication Services (-14.9), Consumer Discretionary (-16.7), S&P 500 (-17.7), Real Estate (-18.8), Materials (-23.5), Industrials (-26.1), Financials (-30.9), and Energy (-46.1) (Fig. 1).

The stocks of tech-related companies involved in cloud computing and gaming have been particularly strong ytd. That’s easier to see when they are grouped together in a hypothetical index that uses their market weightings. An index of Activision Blizzard, Akamai Technologies, Amazon, Electronic Arts, Microsoft, Netflix, Nvidia, and Take-Two Interactive would have returned 6.5% ytd through Tuesday’s close, vastly outperforming the S&P 500’s 17.7% decline.

Let’s take a look at these tech staples that are helping us all maintain some semblance of normalcy during this surreal time:

(1) Not all tech is equal. The tech sector is very diverse, and not all areas will go untouched by the pandemic. Global tech spending will grow 2% this year assuming that the US and other major global economies decline in the first half of 2020 and recover in the second half, Forrester Research estimated in a March 16 blog post. If the recession is longer lasting, there’s a 50% probability that US and global tech spending will decline by 2%.

Communication equipment spending may post declines of 5% to 10%; tech consulting and systems integration services spending could be flat to down 5%; and software spending growth could post 0% to 4% growth. Samsung underlined this risk when it warned that its Q1 profit would be up 3% y/y, near its lowest level in five years due to the global fallout from COVID-19, an April 6 FT article reported.

“Demand for mobile phones, automotive and consumer electronics is falling sharply, which could negatively affect chip demand in the second half [of the year] if the coronavirus outbreak is not brought under control,” according to SK Securities analyst Kim Young-woo, the FT article reported.

But all things related to the cloud still appear to be growing, recession or no. “The only positive notes would be continued growth in demand for cloud infrastructure services and potential increases in spending on specialized software, communications equipment, and telecom services for remote work and education as firms encourage workers to work from home and schools move to online courses,” the Forrester post states.

(2) Welcoming clouds. In my 2018 book Predicting the Markets, I wrote: “When the fax machine first came out, I remember telling my team that we one day would be working from the beach. I foresaw that with technology, we could be productive from anywhere. Since 2007, when I formed my own company, we have been virtual. We don’t have any offices. Everyone works from home or from wherever they like. We replaced a couple of servers we had at a ‘server farm’ with a virtual server on the Amazon cloud in 2012. We subscribe to Microsoft’s Office 365, which allows us to rent the software over the cloud. Our Morning Briefing is delivered to all our accounts by email and posted on the website. Its production is a collaboration among my colleagues and me, invariably entailing a daily flood of email messages among us to get the job done. All these technologies have enhanced our productivity and allowed us to compete in a very competitive market for what we do.”

I was wrong about the beach, but early on the cloud and on working from home at least. Now demand for cloud services undoubtedly is increasing significantly in these troubled times. Jackie joined our firm during 2015 from Barron’s. She reports that she has worked from home for many years. But now she’s joined by her husband, who’s working online and conducting meetings via the Internet, and her kids, who are learning online. Her daughter is taking guitar lessons online, in fact, and her son is glued to Xbox Live, the online gaming system. The whole crew keeps in touch with friends and family via video calls on Zoom and watches Netflix and Apple TV. That’s a lot of bandwidth! Our other team members report similar lifestyles, and so do all of our accounts during our Zoom conference calls.

Microsoft recently gave a small glimpse into the surge of usage its various business lines are experiencing in a March 28 post. The number of Microsoft Teams’ daily active users has more than doubled to 44 million in March from 20 million in November, and Windows Virtual Desktop usage has grown more than threefold. Comcast’s peak Internet traffic has increased 32% since the start of March, an April 4 blog post by stated.

Cloud providers are scattered among three different S&P 500 industries. Microsoft is in the Tech sector’s Systems Software industry (up 2.7% ytd), Amazon is in the Consumer Discretionary sector’s Internet & Direct Marketing Retail industry (up 3.3% ytd), and Google is a member of the Communication Services sector’s Interactive Media & Services industry (down 14.0% ytd) (Fig. 2, Fig. 3, and Fig. 4). The share prices of Google and Facebook both have fallen by more than 10% ytd because the advertising dollars on which they depend have dried up during this time of uncertainty.

(3) Entertainment at home. Much of our at-home entertainment is also delivered via the cloud and Internet connections. Xbox is part of the Microsoft family. Activision Blizzard, Electronic Arts, and Take-Two Interactive Software are members of the Communication Services sector’s Interactive Home Entertainment industry (Fig. 5). It’s down fractionally, -0.3%, ytd.

While Netflix shares are up 15.1% ytd, the industry to which it belongs, Movies & Entertainment, has fallen 14.9% ytd. Other members of the industry, which resides in the Communication Services sector, are suffering from the drop in advertising (Viacom and Fox) as well as the closure of amusement parks, hotels, and cruises (Disney) (Fig. 6).

(4) The tech behind the services. Companies making the hardware and services to make the cloud expand quickly and work seamlessly also have benefited from lifestyle changes during these pandemic times. Akamai Technologies provides web security and cloud services through 240,000 servers in 130 countries. It’s a member of the S&P 500 Tech sector’s Internet Services & Infrastructure industry, which has risen 3.7% ytd and is the third best-performing industry we track (Fig. 7).

At the core of these technologies are semiconductor companies. Their stocks are down ytd but are still outperforming the broader index. The S&P 500 Semiconductor industry has fallen 9.2% compared to the S&P 500’s 17.7% decline (Fig. 8).

Nvidia is a chip maker with products in cloud servers and in high-end gaming laptops. Its exposure to the market’s hottest areas no doubt has helped its stock climb 10.1% ytd. At an analyst meeting in late March, Nvidia said “demand remains strong from ‘hyperscal’ cloud service providers that use Nvidia’s chips in their data centers” and the company is enjoying a “‘surge in PC game play’ as more workers and students are sent home,” a March 24 WSJ article reported. The company also has encouraged investors by maintaining its revenue forecast.

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