[Newsphopick=Kingsley Lim] The advent of COVID-19 is considered a black swan event by many. What is a black swan event? It is a low probability, high impact event. No one saw it coming and eradicating the virus is no certainty. What is definite is that this event will go down in history books as a disaster for humanity. So far, close to 15 million people have been infected globally and there are more than 600,000 deaths caused by the pandemic.
We were never ready for a pandemic of this scale – but technology companies allowed us the freedom of working from home. And so we did. Now, while traditional brick and mortar companies, like retailers and manufacturing companies, are trying to figure out where their customers will come from, technology companies have gotten investors excited with the numbers that have been released so far.
In a matter of months since the market meltdown in April this year, technology companies have rallied aggressively to save the markets. As some observers have noted, tech was ready when the COVID-19 pandemic hit. All of a sudden, Zoom became the ubiquitous software all of us have used at some point. From family meetings, fireside chats, Taco Tuesdays to online social events, Zoom has been the software of choice for a remote meeting. Its rise to fame allowed it to host ten million meetings per day to 300 million, a remarkable spike in its business metrics.
Netflix, the movie-on-demand platform has also been a hit during the COVID-19 pandemic. As the world went into lockdown, Netflix managed to add 25 million customers in a matter of three months, keeping the world entertained and safe at home.
Another company which has benefitted from the pandemic is Amazon Inc. The company’s marketplace and logistics infrastructure that it had spent years developing became extremely efficient in sending goods and products to the homes of millions of Americans.
As users tested the limits of these businesses during COVID-19, these technology companies have fared very well in maintaining service quality. Needless to say, these companies have made our lives much easier.
“We went from a country that did business one way and basically overnight flipped a switch to do it another way, and we had the infrastructure to make that transition without a lot of breakage because of the vision of some really impressive people and companies,” said Brendan Connaughton of Catalyst Private Wealth in San Francisco.
The markets have rewarded tech companies
For the reasons above and more, technology companies have turned in the best performance over the last few months. With other companies struggling to find their next customer, technology companies have seen their market capitalizations balloon.
The Nasdaq Composite Index, a barometer of the health of technology companies, has gone on to reach record highs as investors redeploy capital into ‘safe’ tech stocks. Zoom’s valuation tripled in this year alone to US$70 billion. Amazon and Netflix have seen their share prices increased by 60% this year.
The question looming on the minds of many is: Can technology stocks continue to outperform and show earnings growth in the next several quarters. To answer this question, there are many variables that one has to look at.
However, Netflix’s management has given us a clue. Its executives said that the second half will likely see slower growth as compared to the first half. To exacerbate matters, the company has not been able to produce original content due to production shutdowns. As a result, shares fell and almost US$15 billion of the company’s market capitalization was erased from the markets in a single trading session.
Expect poorer third quarter results
If these chain of events are an indication to what will happen to technology companies, then it would make sense that the surge in user and revenue growth metrics for many technology companies are not sustainable.
According to market observers, there are early indications that technology companies will do well in the second quarter. “This coming quarter is going to be a ‘bright light’ quarter for a lot of companies,” said Maribel Lopez of Lopez Research, suggesting the technology companies will do well for the second quarter.
This view is also shared by Dan Ives, a Wedbush analyst. He said “Unless there’s a silver-bullet business market trajectory change that changes the long-term focus right now, the haters could hate but the path for tech continues to be up and to the right through and after this earnings season.”
The third quarter is a different story though. The fast and furious spending by consumers on the services of technology companies in the second quarter triggered by the pandemic will not be seen in the third quarter. Dan Ives said that “This earnings season [third quarter] is almost a reset, we all have to go back to the beginning, to an understanding of how their business is going to change.”