Covid-19 is accelerating mega-trends in the tech space. David Prosser reveals the tech shares reshaping the world.
The technology sector has had a good crisis. While tech stocks have, on occasion, been caught up in the market volatility prompted by the Covid-19 pandemic – most notably leading September’s sell-off – the sector has escaped the worst impacts of the crisis. Indeed, there is good reason to think that Covid-19 has accelerated many of the trends from which technology companies are benefiting.
This is not to suggest tech is a one-way bet. Market analyst Gartner believes that spending on IT worldwide will actually decelerate this year, as the Covid-19 slowdown bites. At the beginning of the year, it was forecasting growth of 3.7% from the industry in 2020; now it anticipates a decline of 5.5%.
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Still, certain areas of the tech industry look hotter than ever. “Uncertainty can often be a reason to defer investment decisions and the uncertainty created by the pandemic may result in a push out of growth from 2020 into 2021,” says Jeremy Gleeson, fund manager of AXA Framlington Global Technology. “However, we also believe that an outcome of the current crisis will be a higher level of consumption of cloud computing services.”
The world has changed, he says. Take the work-from-home phenomenon. The tools on which businesses have relied in the move to remote working are almost entirely dependent on cloud computing. Employees need to be able to access software products and company data from wherever they happen to be; only businesses making use of software-as-a-service subscriptions and cloud hosting solutions have been able to facilitate that.
Nor, for that matter, would employees have been able to use their downtime to stream music and video on demand from the likes of Spotify (NYSE:SPOT) and Netflix (NASDAQ:NFLX) without cloud computing – or gone online to go shopping. Services such as these rely on cloud solutions too.
“We expect Covid-19 to drive rapid adoption of cloud computing upon which modern software and internet services sit,” says Ben Rogoff, fund manager of Polar Capital Technology (LSE:PCT) investment trust and the open-ended Polar Capital Global Technology fund. He adds: “The public cloud had become the default platform for computers and storage well before Covid-19, but while public cloud growth had been pegged at between 21% to 31% over the next three years, the need to support remote work and learning, telemedicine, over-the-top video, streaming gaming and an e-commerce boom has left these forecasts looking stale.”
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Nor will this demand be temporary: the world will not go back to how it was before in the wake of Covid-19. People may not work entirely from home, for example, but employers and employees alike have recognised the advantages of more flexible working. Moreover, in straitened times, many businesses will find it difficult to invest in both traditional IT solutions and updated cloud capabilities. The latter will be their preference.
Another factor in favour of the cloud, suggests Helen Xiong, fund manager of the Baillie Gifford US Growth Trust (LSE:USA), is worldwide growth in entrepreneurship – and it seems likely that even greater numbers of people will be starting their own ventures in the wake of Covid-19, as the spectre of mass unemployment looms large. “Cloud-based infrastructure platforms such as Stripe, Shopify (NYSE:SHOP), Amazon Web Services and Twilio (NYSE:TWLO) are helping to lower barriers to entrepreneurship,” she says. “Instead of investing vast sums of money up front in building data centres and other types of infrastructure, companies can rent access via these platforms.”
This year’s sales figures from the industry’s leaders underline the explosive nature of the cloud computing revolution. In the first quarter of the year, revenues at market leader Amazon Web Services were up 37% year-on-year; Microsoft Azure’s sales rose 61% and Microsoft’s (NASDAQ:MSFT) cloud division was 52% up.
“Cloud infrastructure and software account for just 4% to 5% of total IT spending today, but are likely to take substantial share over the coming years,” adds Rogoff. “This will come at the expense of legacy technologies that are unable to support or secure remote work, while exploding the myth of the hybrid cloud - the idea that cloud and on-premise computers coexist - as the de facto state of computing today.”
Automation and artificial intelligence
Automation is another area where Covid-19 may have a positive impact. Well before the crisis, manufacturers and other industries were investing significant sums in automation technologies such as robotics, as well as in areas such as machine learning and artificial intelligence. A broad range of products and services promise increased efficiency and greater quality; in some cases, these advances are facilitating completely new business models.
Again, the pandemic looks set to accelerate investment in such solutions. For one thing, producers will be even keener to reduce the size of the human workforces on factory floors. Also, the phenomenal growth of e-commerce demand – super-charged by Covid-19 – will be impossible to support without sophisticated new logistics capabilities.
In addition, Walter Price, who manages the Allianz Technology Trust (LSE:ATT), points out that having been caught out during the pandemic, many organisations are now investing significant sums in supply chain diversification. “China is no longer the default option because when it closed down, businesses that only had Chinese production facilities, or depended on Chinese suppliers, faced real problems,” he says. “As more organisations look to have a range of facilities, including production that is closer to home, that will boost investment in automation.”
As for artificial intelligence, business investment in tools that support resilience and augment human productivity looks set to continue to grow. The technology analyst IDC thinks the global artificial intelligence market will grow by 12% this year; and as Covid-19 uncertainty eases, it its expecting that figure to accelerate to an average annual rate of 17% year over the 2019-2024 period.
“The role of artificial intelligence applications in enterprises is rapidly evolving; it is transforming how your customers buy, your suppliers deliver, and your competitors compete,” says Ritu Jyoti, a vice president at IDC. “Artificial intelligent applications continue to be at the forefront of digital transformation initiatives, driving both innovation and improvement in business operations.”
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Renewable energy and battery revolution
Elsewhere, renewable energy looks set to be another example of Covid-19 accelerating an existing trend to the tech sector’s favour. Investment in green technologies was rising fast before the pandemic struck, as the world began to face up to the challenge of reducing its carbon emissions, but in the aftermath of the virus, that looks set to speed up.
One driver is that as policymakers look to stimulate their moribund economies with fiscal initiatives, green energy is an obvious area to prioritise. In the UK, for example, prime minister Boris Johnson has already announced new funding for wind power.
Also, the pandemic has encouraged more people to embrace environmental causes – for example, the temporary lull in economic activity during lockdown, with its positive effects on air quality, has prompted calls for an even more rapid shift to carbon neutrality.
Businesses with viable energy storage solutions could be one major beneficiary of this phenomenon, argues Allianz Technology Trust’s Walter Price. Scepticism about renewable energy is often fuelled by concern about the intermittent nature of wind and solar power, so the ability to store excess power for use when it is needed later is crucial, Price points out.
“Tesla (NASDAQ:TSLA) is a market leader in battery storage, although this is often overlooked,” Price says. “More broadly, the renewable energy sector does now have a new product to sell in its storage technologies.” Moreover, that product can be sold to both business customers and consumers. Companies such as SolarEdge (NASDAQ:SEDG) have developed affordable storage solutions aimed at households; in California, where Price lives, these products are now in huge demand as the local electricity grid is suffering increasingly frequent power outages.
The bottom line, is that the mega-trends of technology are far from over. While Covid-19 is undoubtedly changing the world, the pandemic’s impact on the tech sector has very often been to shove already fast-moving developments forwards at an even greater pace, rather than to change their trajectory.
There will no doubt be further volatility among tech stocks, but the long-term direction of travel is clear, argues Walter Price.
“The tech sector continues to benefit from strong tailwinds that should continue to drive attractive long-term appreciation,” he says. “There is no question in our minds that the Covid-19 crisis will spur the use of technology and change how we live and work in the future.”
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