The great digital acceleration
Despite the incredibly strong market recovery since the COVID-19 lows recorded in late-March, price moves have been far from uniform. Areas that have been hardest hit from various shutdowns include resorts and cruise lines, airlines, energy stocks and financials. At the other extreme, companies deemed to be clear beneficiaries from the work from home theme have enjoyed excellent share price moves.
It seems structural changes around digital transformation is occurring in a compressed timeframe. While disruptive forces have been going on for years, the COVID-19 pandemic has accelerated their pace. The commentary from many technology companies in their June 2020 Quarter conference calls were remarkably similar, irrelevant of their geography. Examples included:
Alibaba (market capitalisation of US$680 billion): “The pandemic has fundamentally altered consumer behaviour and enterprise operations, making digital adoption and transformation a necessity”
Google (market capitalisation of US$1,020 billion): “Long-term acceleration of movement from businesses to digital services…These changes will be significant and lasting…cloud is an obvious area. If you have data centres these are fixed costs…”
Shopify (market capitalisation of US$121 billion): “when it comes to the retail industry, we’ve just jumped a lot of years in the future” and
Twilio (market capitalisation of US$36 billion): “These digital transformation projects were slated for quarters or years…many of these got done in weeks. And so, this is going to be seen as a great digital acceleration.”
Investors should nevertheless be mindful that even those industries with enormous tailwinds have sub-cycles, and when there is a loss of momentum companies share prices can be temporarily de-rated.
The transformation to online retailing, for example, is seeing 7,000-8,000 US retailers closing their doors annually, however in 2020 this figure is expected to hit 25,000.
In this research report by Adobe, where they measured transactions at 80 of the top 100 US retailers, e-commerce spending is forecast to grow at 35 per cent in 2020 on 2019.
One area which has seen phenomenal growth is “back to school items and computers,” which have surged to facilitate online learning. For the five months to July 2020, the growth rates have been averaging 80 per cent and 140 per cent, respectively, on the previous corresponding period.
Interestingly, the online retail spending growth rate has come down from 76 per cent year on year in June to “just” 55 per cent year on year in July. Importantly, those States that are reopening are seeing smaller increases in online spend (8 per cent year on year in July) than States that are maintaining stricter lockdown protocols.
While it has a structural tailwind, any deceleration of the online growth rate seems probable as economies open up. To what degree are these extraordinary growth figures encapsulated into share prices?
The Montgomery Global Funds and Montaka own shares in Alphabet. This article was prepared 12 August with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade these companies you should seek financial advice.