COVID and tech: what have we learned as investors?

Technology has kicked off a multi-year journey where consumers are accelerating the pace of adoption of the cloud, e-commerce and other technologies, while businesses consider the digitisation of their operations. We believe that investors should aim to be positioned to benefit from both a cyclical recovery, as well as the big secular themes that will express themselves over the next several years.

Our expectations for the tech sector pre-COVID

It is really interesting to think about what’s transpired since the beginning of the year because if I rewind the clock the last couple of years, we have been in an environment where there have been clear secular growth themes that have been expressing themselves and those have been in areas such as software and the internet. And then there have been parts of technology like the semiconductor global supply chain that has actually experienced a lot more stress and the predominant reason for that has been trade-war related. And so coming into this year, initially our expectations were that we would start to get some relief from the trade war; the world would have adjusted to the new realities of how supply chains would start to get reshaped and we would start to see a more broad-based recovery and what I call the ‘physical’ part of the technology world. And then we would see the continuation of ongoing trends associated with software as a service, where software continues to “eat the world”*, you know, internet businesses continuing to thrive because of network affects and the ongoing movement of physical to digital currency with payments and fintech models. 

We expected an almost virtuous environment for 2020 where you had the physical economy working well for tech and also the other sectors of the information economy that are continuing to flourish.

How COVID has changed the tech landscape

And now if we think about what happened with COVID, it created an ongoing difficult environment for the physical supply-based companies across all sectors whether analogue or digital, maybe with the exception of data centres. And with the move to shelter in place and stay at home, we really accelerated a number of trends that have been at work and compressed maybe a couple of years of innovation into three or four months. 

And it may not completely express itself in the numbers, the behaviours associated with what we have done has compressed the timeline of adoption for both consumers and enterprises in a way that we probably could have never imagined. 

And that has everything to do from consumers and the adoption of e-commerce. Once people start to appreciate those attributes around e-commerce, around grocery delivery, around food delivery, there is just a lot in the efficiency of that that people have come to appreciate in their lives. And then from an enterprise standpoint, every company on the planet that hadn’t contemplated just how fast they were going to get to the cloud, just how fast they were going to have a completely virtualised company, or be able to support a virtualised company through 100% of the business being digitised and whether, what part of the process organisations got through. And the primary one is just to enable people to be able to work. But now, we were just kicking off a multi-year journey where customers are going to accelerate the pace by which they were going to the cloud and how they were adopting many of these types of technologies that we have been talking about for several years.

Considerations going forward

As we start to look forward and we think about where we go from here, I believe it is this delicate balance because the market has clearly recognised these themes. 

The market has seen the growth that some companies have expressed so far, that is meaningfully higher than we would have expected it to be coming into the year and we have also seen companies that have shown themselves to be more cyclical than we would have expected. 

A really good example of that are the payments companies, just because they just weren’t designed for a global pandemic where travel comes to a halt, and both consumer and going out to restaurants and retail and shopping and things like that. And so those models were stress tested and it has created an environment now where we try to think: what’s the balance of the companies that are going to be best positioned as the economy recovers? What is the pace of that recovery is going to be and will it be in physical assets like semiconductors, if it’s in digital payments? Because of what we will ultimately start to see as people travel again both domestically and cross border. And then the idea of just the duration that we have created with some of these structural growth names continues to create a very meaningful opportunity.

Summary

So the shape of the economic recovery is going to shape the ultimate financial performance of companies in the more cyclical industries. And then the companies that are just more levered to the big secular trends are going to continue to do well in a number of different economic environments. And so that’s the way we think about it. We try to get positioned for the best of both worlds where we do get some benefit from cyclical recovery, but then we also continue to be really well positioned against the big secular themes that will express themselves over the next several years.

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