As Covid-19 pushed half the world into lockdown last year, the sudden shift to working from home brought dramatic changes in how businesses run and consumers live. But a massive new digital wave may be on the way for tech stocks.
Clampdowns on business and social activities are finally lifting. In New York, Gov. Andrew Cuomo said he will drop most of his state’s Covid-19 restrictions now that 70% of all adults have received at least one vaccine shot. So now many analysts have issued countless reports touting a coming “digital transformation” that is the greatest in decades. They expect it to be a big long-term driver for tech stocks — especially those now known as “Covid stocks.”
Covid-19 caused firms to shift to remote work at a speed never before seen. Seemingly overnight, employees worked remotely. Sometimes it led to work disruptions when the tech was not updated. But the pandemic accelerated the digitization of most business models. Health care sped its move into telehealth, retail pushed into e-commerce, and banking morphed into fintech.
Consumers also changed how they work, shop and entertain. Now researchers and analysts see a historic, global shift in deploying digital communications across every domain and platform well underway. Spending is expected to reach into the trillions. Researcher IDC says it could hit that mark by 2023.
“The scale is unprecedented,” Laura LaBerge, digital strategy group consultant at management firm McKinsey, told Investor’s Business Daily. “We are witnessing what will surely be remembered as a historic deployment of remote work and digital access to services across every domain.”
Tech Stocks: Digitizing Every Aspect Of Business
Businesses now focus on digitizing every aspect of their business as fast as possible. Technologies making this move possible include cloud computing, e-commerce, digital payments, artificial intelligence, 5G wireless and videoconferencing. Also part of the trend is the Internet of Things, a technology used to create smart digital devices. Among them: thermostats, TVs, smartphones and digital assistants.
Plenty of tech stocks in these fields are top performers.
“Tech stocks were the clear winners over the past year as consumers/enterprises needed the technology around e-commerce, cloud computing and work from home to navigate through this pandemic,” Wedbush analyst Dan Ives told IBD.
The pandemic created what some refer to as Covid stocks. These firms were largely immune to how the virus shattered other businesses, such as travel.
Covid stocks include Zoom (ZM), Microsoft (MSFT), Amazon (AMZN) and Google-owner Alphabet (GOOGL). The pandemic also proved a boon for cybersecurity players, such as Okta (OKTA), CrowdStrike (CRWD) and Zscaler (ZS).
An Acceleration Of Tech Use
“This tech party is just getting started with consumer- and enterprise-driven demand catalyzing a multiyear growth boom for the tech stocks sector looking ahead,” said Ives. “Digital transformation across the enterprise and consumer world is just in its first few innings of playing out.”
A McKinsey survey showed companies worldwide sped up automation of customer service and supply chains by three to four years. The same was true for internal operations, executives said. And the share of digitally enabled products in their portfolios accelerated even faster.
McKinsey says the first half of 2020 saw an increase in e-commerce equivalent to that of the previous 10 years. Companies also were three times more likely to conduct at least 80% of their customer interactions digitally post-Covid.
Among other changes spurred by the pandemic, grocery stores and restaurants continue to deploy new online ordering and delivery services. Hospitals are moving to telehealth services. Manufacturers now actively plan for fully automated factories and supply-chain logistics.
The ‘Digital Adoption’
Analysts, in their reports, refer to the trend as “digital adoption” or “digital acceleration.” Along with company executives, they believe it’s the greatest tech transition in decades. IDC predicts the shift will account for $2.3 trillion in spending by 2023, almost double today’s levels.
“Digital adoption will catalyze a multiyear growth boom for tech stocks,” said Ives. “It’s creating a massive ripple effect unlike anything I’ve ever seen.”
Some analysts aren’t so sure. UBS analyst Karl Keirstead says corporate spending on “digital transformation” projects has been disappointing for software growth stocks in 2021.
“The post-Covid ‘digital acceleration’ theme that drove software stock valuations to record heights has simply not panned out as expected,” he said in a recent note to clients. “There is no clear evidence of any growth acceleration across the entire software sector, at least in reported financial metrics, despite the improvement in overall IT budgets starting in Q4 2020.”
“If overall IT spend as a percentage of revenues was indeed rising, one would think that it would show up in reported results from software companies first,” Keirstead went on to say. “It hasn’t.”
Tech Stocks In The Cloud
For most firms, the need to work and interact with customers remotely called for big investments. That included such areas as data security and a speedier migration to the cloud.
“We estimate the market for cloud services is likely to more than double in the next few years, touching nearly $600 billion in revenue by 2024,” brokerage UBS said in a recent note to clients. That’s up from $270 billion in 2019. UBS also found that 44% of the 850 respondents to a survey expect accelerated cloud adoption post-Covid.
Software and service providers worldwide note increased demand from customers. That eased the transition to remote working. It also benefits software-as-a-service vendors such as Salesforce.com (CRM) and ServiceNow (NOW), UBS said.
Companies with worker collaboration solutions to allow working from home also will be in high demand, Ives believes. They include companies such as Microsoft with its Teams platform. There’s also Cisco (CSCO) with WebEx, and Alphabet with its Workspace platform. Other providers include Slack Technologies (WORK) and Atlassian (TEAM).
UBS expects more than 24 million tech workers to work remotely by 2024. Gartner expects about one-third of the world’s workforce to work from home by 2024.
Popular Apps For Working From Home
Cybersecurity firm Okta says some of the most popular stocks for working from home include Zoom, Amazon’s AWS and DocuSign. Other fast-growing apps and services come from Snowflake (SNOW), Asana (ASAN) and Jamf Holding (JAMF).
Snowflake warehouses data on the cloud, and provides businesses with an integrated data management system. Asana offers a web and mobile application designed to help teams organize, track and manage their work. Jamf helps firms deploy, manage and secure devices made by Apple (AAPL).
All of this fits the picture of the Fourth Industrial Revolution. Analysts say it describes the far-reaching changes — cultural and social, as well as economic. The movement’s drive comes from industries harnessing new technologies to boost efficiency. Along the way, they tap new markets and adopt new forms of production.
Twilio (TWLO) provides software tools firms use to develop cloud-based communications. It recently conducted a survey of more than 2,500 decision-makers to gauge the effects of Covid-19. Twilio also checked for its lasting effect on businesses and their customers.
“Over the last few months,” the report said, “we’ve seen years-long digital transformation roadmaps compressed into days and weeks in order to adapt to the new normal as a result of Covid-19.”
“When the pandemic started, companies initially began to lower their financial forecasts,” Glenn Weinstein, chief customer officer at Twilio, told IBD. “So we were surprised in the early weeks of the pandemic to see a notable uptick in demand for our services.”
New Ways Of Engaging Customers
About 95% of the companies Twilio polled sought new ways to engage customers as a result of Covid-19. Another 92% called a shift in digital communications extremely or very critical to address business challenges now.
“We had tremendous success in digital transformation, ” said Nike Chief Executive John Donahoe, in a conference call with analysts. “We quickly pivoted to serve consumers as they shifted to digital channels.”
Donahoe recently spoke at a Twilio conference. When the pandemic struck a year ago, Nike closed all its retail stores and switched to 100% online sales.
“All of a sudden, it was the only way we were connecting with consumers,” he said. “We saw more and more consumers engaging with our digital commerce through all of our apps.”
With 35,000 retail employees suddenly homebound, Nike built an app on top of the Twilio platform. A consumer shopping on its mobile app might have a question about a product. That goes via text to retail store employees at home to answer.
Bullish View On Tech Stocks
In a recent note to clients, Wedbush’s Ives said he “has been pounding the table about the growth opportunity for tech stocks that emerged from Covid-19.”
“We believe tech stocks have another 25%-plus upward move in the cards over the coming year led by FAANG, cloud and cybersecurity names,” Ives went on to say. “In a nutshell, the emotional bull/bear debate on tech valuations is not going to go away, but we believe the underlying fundamental stories and white-hot growth creates a yellow brick road to an upward bullish trend for the tech stocks sector into the rest of 2021.”
Please follow Brian Deagon on Twitter at @IBD_BDeagon for more on tech stocks, analysis and financial markets.
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