Every major event leaves a lingering after-taste. Consider how investment banking changed after the Tech bubble, or how travel changed after 9-11. Think also of the change in mortgage due diligence that took hold after the 2008 financial crisis. In the case of the COVID-19 Crisis, we believe one of the biggest shifts will be an acceleration of the digitization of the economy.
Sometimes societal and business trends change slowly, allowing some investors the notion that value may still exist in companies that are getting left behind. For example, prior to the COVID-19 crisis, there were those who believed that department stores were value plays, in part due to their real estate holdings and partly due to their belief that the stocks were oversold. That also held true for office REITs and mall REITs. This thinking has shifted and so has our investment focus. While we were actively investing in these digitization themes prior to the COVID-19 crisis, we are even more focused on them now. Here are some highlights from first quarter earnings calls to prove the point:
Alphabet (Google’s parent company)
“Many parts of the economy are also able to continue with some semblance of normalcy, thanks to advances in remote work, online shopping, delivery options, home entertainment and telemedicine. […] Ultimately, we’ll see a long-term acceleration of movement from businesses to digital services, including increased online work, education, medicine, shopping and entertainment. These changes will be significant and lasting.”
“We’re seeing a lot of businesses that were primarily physical, now moving towards selling stuff online for the first time, and we’re seeing a lot of businesses that already had a digital presence now really transition to having their digital presence be their primary presence … I do think plays into a pre-existing long-term trend.”
“Online orders have increased significantly and have been an important factor driving DIY sales.”
“[CEOs] know if they’re not digitally transformed and their competitors are, they’re going to get wiped out.”
“We have seen a dramatic increase in e-commerce in this time of low mobility, and we expect some of these behaviors to persist going forward.”
“In terms of secular shifts, I think there’s a reasonable prospect that there will be much more use of the internet coming out of this permanently than there was going in. […] and after people get used to doing that for an extended period, a lot of that share gain may become permanent.”
These examples are just a sample of what we’ve heard during recent earnings calls regarding the digital shift taking place. It’s already been a transformative year in so many ways and we are eager to see what innovation comes next.