After witnessing the defensive qualities that made technology a good bet during the pandemic, many investors have spent this year hunting for the perfect “opening up” trade — the sector that will benefit most from the gradual lifting of restrictions. It turns out they didn’t need to look far after all.
Earnings reports this week from the biggest US tech companies show that the surge in spending on new gadgets and digital services was not just a product of lockdowns. The mood in tech circles has been almost triumphalist, as executives line up to declare that it represents a permanent shift.
After blockbuster earnings for the first half of this year, however, the growth rates are about to get choppy. A booming digital economy may have been one of the consequences of the pandemic, but its impact will not be uniform. There will be post-pandemic adjustments to navigate.
For a start, the almost perfect backdrop that brought soaring profits for Big Tech in the first half of the year is unlikely to hold in the second half. Apple expects the chip shortages affecting manufacturers globally to hit iPhone production in the current quarter. Meanwhile, Facebook is facing a serious test as Apple’s privacy crackdown starts to take effect, choking off the flow of personal data from the iPhone that feeds Facebook’s advertising.
Even without complications like these, the comparisons are about to get much more difficult.
Apple’s iPhone business moves in huge cycles. In 2019 and 2020 its revenue rose a total of only 3 per cent, before the iPhone 12 launch that is forecast by analysts to lift 2021 revenue by a cool $80bn, or 29 per cent. Next year, by contrast, growth is expected to fall back again, to 4 per cent. Selling music and TV to owners of its gadgets may have given it a more consistent source of income, but this can’t iron out the massive hardware swings, or prevent investors fretting about whether the next iPhone cycle will live up to the hopes.
Digital advertising is also riding a rollercoaster. After a 2.5 per cent decline last year, total global advertising is likely to rebound 14 per cent this year, according to IPG’s media research arm, Magna. Almost all of that growth is flowing into digital — and the giants are getting a disproportionate share, with Wall Street expecting Google and Facebook to grow 30 and 35 per cent respectively. The boom will moderate later this year as the pandemic rebound recedes.
Against this background, there are two broader uncertainties as life finds its post-Covid normality. One is how strong the digital habits that many consumers learned during the lockdown will turn out to be.
Even if the tech boosters are right to claim that there has been a permanent shift, at least some of the behaviours forced on consumers and workers last year are likely to change. Streaming TV and video conferencing are two of the most obvious services set for a pullback. The fall in Netflix’s audience in the US and Canada, and Zoom’s race to diversify into new markets like call centres, are two signs of this.
That said, the pandemic was a gift to the tech sector. Persuading consumers to change their habits is often the hardest part of building a market for a new tech service, so forced adoption in the lockdown was invaluable. Where digital services deliver speed, convenience and greater choice, there’s a good chance the new habits will stick.
The other big question is whether some of the boom in corporate tech spending represented a pull-forward of IT demand from future periods. If customers adopted new technologies a year or two earlier than they had planned, does that mean they will now spend less for a while? One Silicon Valley investor points out that this could play havoc with the financial models venture capitalists use to assess start-ups.
But despite these uncertainties, the fundamental backdrop for tech coming out of the pandemic remains strong.
Microsoft chief executive officer Satya Nadella predicted this week that the growth in consumer demand for technology, after getting a one-off lift, would normalise. But he also claimed that the massive dislocation from the pandemic had made all companies realise they needed to overhaul their operations to make them more resilient in future. If that is right, then the tech boom has a lot further to run.