The Evolving Economy

How COVID-19 has accelerated trends in the digital economy

  • Many companies at the centre of the digital economy have been well-placed to support life under lockdown
  • The importance of the tools, products and services offered by these companies has been proven not just for the crisis phase but well beyond - the digital transformation of society is a multi-decade trend
  • Companies within the digital economy offer exciting growth potential to long-term investors

The spread of COVID-19 has created a challenging environment for equity investors, despite a market rebound in recent weeks. With a great deal of uncertainty remaining over the recovery period and the long-term impact of the virus, it is reasonable to expect ongoing volatility for some time yet.  However, it has not all been bad news as there are actually plenty of companies which have seen increased demand for goods and services during this period.

A lot of these companies sit in sectors at the centre of the ‘digital economy’. This describes the growth of digital connectivity within society which is transforming the way we work, socialise, shop, entertain and educate ourselves, and even exercise. Importantly, the sudden, dramatic changes most of us have adopted in our daily lives in recent weeks are not completely new habits. Rather, we are observing an acceleration in the multi-year trends shaping the future of our societies.

Smartphone adoption and increasingly faster and cheaper internet over recent years has enabled the growth of the types of online tools which, although not designed for these conditions, have been proved well suited for them. As such, many sectors related to digital transformation have held up relatively well in this difficult market environment. This period may prove to be a fertile one for astute, active stock-pickers with a long-term investment horizon.

Thriving companies

The companies we have seen posting sales growth during the ‘lockdown’ phase and beyond can be broadly grouped into three areas: those that benefit from a rise in demand for e-commerce; those that benefit from people staying safely at home; and those that benefit from a switch to widespread remote working.

These companies may not be seen to have an aggressive growth profile once the crisis subsides, but their importance to society has been proven. Taking a longer-term view, they are still expected to benefit for years to come from structural growth drivers in the digital economy theme.

  • E-commerce

Companies with a strong online strategy have naturally proved more resilient to the lockdown situation, but the growth of e-commerce is a long-term trend. Amazon and Alibaba are global leaders in e-commerce, while Ocado, the UK online grocery retailer specialist, keeps growing by gaining market share in its domestic market and expanding internationally with foreign partners. Any shift from offline to online is also an opportunity for companies such as PayPal and Global Payments, which enable digital transactions to be completed. Additionally, even as physical shops re-open, contactless point of sale solutions (such as Apple Pay) may be preferred over cash when paying in a shop to minimise physical contact. 

  • Staying safely at home

Where governments have asked populations to stay at home for an extended period of time, we have seen a significant increase in the use of online platforms and video games for socialising and entertainment. Companies within the communication services sector such as Netflix, or video game companies like Electronic Arts and Activision Blizzard, have seen increased use of their products and services. Likewise, the time spent on social media such as Facebook and WeChat and online video platforms such as YouTube has increased.

  • Remote working

The concept of remote working has increasingly become part of the normal routine of many workers during recent years. The introduction of full-time working from home by many companies under lockdown could very well drive further adoption and a change of working habits once lockdowns have been fully lifted. In addition to the flexibility benefit to employees, for many employers, the lockdown has been a live test of the efficiencies of reduced corporate travel and real estate costs through the use of virtual tools.

German software company TeamViewer is a provider of such tools. Being able to maintain some degree of team cohesion while working remotely is important; software tools that enable employees to collaborate more effectively could see a longer-term increase in use, as could video conferencing solutions provided by specialists such as Atlassian and Zoom Video Communications.

Additionally, cloud service solutions such as Amazon Web Services and Microsoft’s Azure have seen a significant increase in demand for these services over the last few months. Also, customer service desks such as Zendesk; and contact centre technology such as that from Five9, which enables remote support and the servicing of customers’ needs, proved to be invaluable during such period of time.  Meanwhile, opening up enterprise networks for employee access also raises the risk of security of these networks. We have seen some cyber security companies, such as ProofPoint and ZScaler, demonstrate a little more resilience in the recent volatile markets.

Struggling companies and opportunities

Although there a number of brands thriving in the current environment, there are still some digitally-driven business models that have struggled. This is especially true of those operating in sectors that have suffered from steep declines in demand as a result of current restrictions such as travel. Volatile periods can often offer interesting opportunities to active stock-pickers, and there could be plenty more volatility in the weeks and months ahead.

The current situation has truly been a black swan event, something very difficult to have predicted, and even now in the midst of it, is hard to forecast the duration or the magnitude of the effects. However, digital transformation is expected to be an important business focus for the coming years. The trends associated with the digital economy theme, such as online commerce, digital media consumption, electronic payments and digital transformation, remain intact and could even play out stronger, once the current turmoil is over. As always, any long-term investor should resist panicking and recognise the opportunities on offer.

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