When the rest of the world reeled in chaos as a result of a pandemic, major tech companies are making money like never before.
With stringent lockdown measures in place and billions forced to work, shop and learn from the comfort of their homes, tech giants Facebook, Amazon, Apple, Microsoft, and Google have all been reeling in massive piles of money as a result.
Despite all-round market pessimism, technology sector is evidently offering a glimmer of hope for much rattled investors!
At a time when brick-and-mortar stores are laying off employees, these titans are hiring hundreds of thousands to meet the rising online order demand for items from medicines and food, to books and clothing.
So, what this signifies is that despite all-round market pessimism, technology sector is evidently offering a glimmer of hope for much rattled investors. And it goes with saying, such stocks will definitely work as defensives in these extraordinary circumstances.
Enormous tech reliance
Big Tech is now witnessing a much higher reliance for their digital services when people were told not to make any physical contact with others and practice ‘social distancing’ to keep the virus contained.
Amazon said it was hiring 100,000 warehouse workers to meet surging demand. Facebook said traffic for video calling and messaging had exploded.
Microsoft said the numbers using its software for online collaborative platforms had climbed nearly 40 per cent in a week.
Amazon and Facebook have held up better than the broader market since the market decline began, with Amazon down 12 per cent and Facebook down 24 per cent, compared to the 28 per cent loss of the S&P 500.
That trend persists even over the longer term, with Amazon gaining 7 per cent over the past year, even as Facebook and the S&P have fallen 7 per cent and 9 per cent, respectively, giving Amazon the edge on performance.
Amazon and Facebook have held up better than the broader market since the market decline began
Both, Facebook and Amazon, are more attractively priced than in mid-February, from a strictly-valuation perspective.
Facebook is a better value based on its price-to-earnings ratio and price-to-free-cash-flow ratio, while Amazon is less expensive based on the price-to-sales ratio.
Amazon boasts better stock performance, while Facebook has the edge in valuation.
One reason for Amazon’s increase in demand is that shoppers are now buying a broader variety of goods, and Amazon in turn has now been delivering everything to everyone.
The current crisis has helped it mainly overcome its challenge of getting customers to trust it when it comes to shopping for groceries. As more customers try different Amazon services, they may create permanent shifts in buying habits, analysts indicate.
As more customers try different Amazon services, they may create permanent shifts in buying habits, analysts indicate.
Netflix, YouTube go boom!
Streaming services like Netflix, which have consistently weighed on box office sales for movies in recent years, is now gaining a new audience as movie theaters close under government orders against public gathering.
YouTube too is benefitting from this reversal in fortunes.
Stay-at-home orders are unsurprisingly increasing traffic to video streaming sites, apps and social media platforms.
Downloads of Netflix’s app — a proxy for traffic from the streaming site — jumped 66 per cent in Italy, according to data from Sensor Tower, an app data company.
In Spain, they rose 35 per cent. In the United States, where Netflix was already popular, there was a 9 per cent bump.
Voice calling over Facebook’s WhatsApp messaging service has doubled in volume, Facebook’s Mark Zuckerberg revealed recently, with Facebook’s Messenger app also recording similar growth.
Microsoft has aggressively pushed its new business messaging and collaboration tool, Microsoft Teams, which competes with the independent company Slack.
In one particular week alone, Microsoft said the number of users on Teams had grown 37 per cent and revealed that there were at least 900 million meeting and call minutes on Teams every day.
Microsoft has aggressively pushed its new business messaging and collaboration tool, Microsoft Teams, which competes with the independent company Slack.
Microsoft, Oracle taps work-at-homers
Like Microsoft, Oracle too has been offering cloud services to armies of from-home workers lacking their office mainframe.
Microsoft and Oracle have also additionally been boosted by unexpectedly voluminous shipments of laptops and communication software.
As workers and students are forced to work and learn at home, older PCs with poor-quality cameras and audio won’t cut it if they have to interact with customers or teachers online.
Also by having much of Apple’s consumers stay inside, it has almost certainly been good news for the iPhone maker.
With shift in consumer habits, Apple has sought to move away from its heavy reliance on device sales and toward so-called services revenue, which includes app sales and subscriptions to its music and TV services.
More time and money spent on phones is also good news for Apple and Google because they take a cut of most app sales.
During the first two weeks of March alone, especially when the virus effects were peaking in most global hotspots, US iPhone app sales grew 20 per cent, while US Android app sales increased 14 per cent, according to monitor Sensor Tower.
Analysts go bullish on tech
And analysts have chimed in with a glorious outlook for these tech titans, saying the largest tech companies are much likely to emerge on the other side of this crisis much stronger.
Amidst a crashing stock market, analysts recommend investing in “stay-at-home” stocks, which include the known shopping and streaming services, and tech stocks such as these.
Big Tech may be capitalizing on higher demand at one end, but a major source of revenue – advertising – has taken a severe blow.
However, one cannot say that Big Tech haven’t had have their fair share of troubles. They may be capitalising on higher demand at one end, but a major source of revenue – advertising – has taken a severe blow.
Ad revenue, which is the lifeblood of firms like Google and Facebook, tends to suffer during economic downturns. And this is evident in their stock performance as well.
The stocks of Apple, Microsoft, Amazon, Facebook and Google’s parent company, Alphabet, have together lost more than $1 trillion in market value from two months ago, when US stocks were trading at record highs.
While communication tools like the videoconferencing service Zoom are now essential, ride-hailing firms like Uber and Lyft and property-rental sites like Airbnb and travel shopping firm Expedia are seeing customers vanish.
History repeating itself?
There has always been a pattern where many of the tech companies survive through the worst of recessions.
The great recession caused by the housing bubble in 2007-2008 was devastating for some industries. Some, like the auto industry, needed bailout money to survive.
Tech stocks did take some hard hits in the past, but the industry survived and eventually recovered.
Not all tech companies come out stronger after a recession. Some may not even survive.
But not all tech companies come out stronger after a recession. Some may not even survive. But history shows us that recessions can also serve a purpose of filtering out stocks with faulty operational strategies.
The dot-com bust of 1999-2000, for example, was a tough one for tech, but in the end it weeded out the companies that got funded on business models that didn’t show a clear path to actually making money.
From 2002-2008, we saw companies grow more disciplined and only got funded if they showed real promise as moneymakers.
During this period, Facebook, Twitter, Uber, and many others took off and started the tech boom that continues even today.
Immune to downturn?
The global technology industry will suffer this year, though it still unclear by how much.
Analysts had forecast much before the pandemic that sales of hardware, software and services would grow by 5 percent worldwide in 2020.
The global technology industry will suffer this year, though it still unclear by how much.
But now with the lockdowns disrupting supplies and cutting sales in China, analysts now say that annual revenue might inch ahead at only 1 percent – and that too is on the fairly optimistic side.
If one recalls a time before the pandemic, for roughly two years tech firms saw lawmakers, regulators and competitors turn against them over matters ranging from privacy, regulations and market monopoly.
Although the tech industry is not immune to a recession, it is in a much better place to weather the crisis than the travel industry, for example.
We’ll see the need for more technology, not less, to help us get through this challenging time in our history.
Now when the economy does eventually improve, and with the latest trend reversal, Big Tech could actually benefit from changes in consumer habits.
And despite being much criticized before the pandemic hit, the biggest companies are likely to finish the year stronger than ever.
What tech stocks are added into one’s portfolio
The tech sector can be a tough one for new investors to understand, when it comes to adding them in one’s portfolio.
The wide selection of software, hardware, and ecosystem plays can be mind-boggling, while industry jargon can be confusing.
Definite first picks are blue-chip companies that have posted steady growth in the past. Intel, Microsoft, Apple, and Cisco are widely considered such by tech analysts.
Investors looking for more growth potential will turn their attention to tech stocks with higher valuations, which tend to lack the safety of blue-chip stocks.
These include companies that have mostly one area of expertise in a market that is booming, or technically put, “pure play companies” versus companies that are larger and much diversified.
Also companies whose main product is just one, like for example, a firewall that shields businesses from data breaches. Or it just could be a data analytics firm whose software helps businesses improve operational efficiency.
Long-term investing in the tech sector requires the ability to see how the world will look in 10, 20, or 30 years.
Therefore, investors should keep an eye out for the growth of disruptive ecosystems, like the ones Google, Amazon, and Facebook are developing.
Google is most widely known for its search engine and mobile OS, but it has also invested in driverless cars, robots, artificial intelligence, genetic testing, and biotechnology.
Facebook is expanding into IoT tech, virtual reality, mobile payments, and video hosting.
Meanwhile, Amazon is known as an e-commerce giant today, but its growth into the cloud, IoT, and smart home industries shouldn't be overlooked.
