What businesses will have tailwinds post COVID-19?
Steve Jobs was famous for nurturing Apple’s enormous cash pile even when he was advised to spend it. He knew that even the most successful companies are vulnerable to market changes and the ups and downs of the industry
Steve Jobs was famous for nurturing Apple’s enormous cash pile even when he was advised to spend it. He knew that even the most successful companies are vulnerable to market changes and the ups and downs of the industry. Even though Apple’s cash pile was vastly reduced after Job’s death, today, the company has nearly $100bn which could fund their entire R&D and capital spending budgets for nearly four years, even if no sales came in at all.
Conversely, in the novel ‘Shoe Dog’, Nike founder Phil Knight recalled how he invested every spare dollar back into the business, and remarked that the business ‘was not broke, we just had no cash’ and outlines how his conservative banker would often plead with him to ensure some of his profits went into equity. However, he would ‘force them into a game of chicken’ ordering huge quantities of shoes and borrowing to just barely pay for them, despite huge growth in sales numbers. It was once Nike got out of this cycle and began to think like companies such as Apple, in relation to cash, that they managed to truly become dominant.
Apple is not the only tech company following this principle. Some others also had a huge cash position before the COVID-19 crisis. Now it will potentially be paying off as it’s giving them extra security and capacity to power through this period.
Counting tech giants such as Alphabet, Microsoft, Facebook and Amazon, the combined net cash reserves of the big technology companies now total more than $350bn.
“Software names are not exactly recession proof, but they’re more resilient to downturn,” says Rishi Jaluria, senior research analyst at D.A. Davidson.
The cash position of a lot of technology companies looks to not only escape from the current COVID-19 crisis unscathed, but possibly grow for a variety of reasons.
Firstly, many companies will not be affected by a lack of consistent revenue due to their subscription model. Subscription revenue was 60% for most technology companies during the GFC, but is now up at 80%. Customers who are already subscribed to a service will, in many cases, need to keep using that service. For most people, it’s simply not a possibility to unsubscribe as they need these services in daily life making subscription services more immune to market turmoil.
Secondly, the changing nature of business as usual is forcing companies to adapt and use various technological offerings to ensure that business keeps rolling. Most of us are forced to work, conduct meetings, and stay in touch with loved ones virtually these days.
Technology businesses could benefit from this shift even post COVID-19. The technology to do more online has been here for a while, but there has never been a real need to test if it could work under pressure – until now.
“Necessity is the mother of invention” as Plato said, and COVID-19 has proved that it’s possible to do almost anything online.
Take Reach Markets for example. We regularly do institutional roadshows. Under normal circumstances we would have two or three staff members get on a plane to Singapore, take a taxi to a hotel, eat out, zap around town for business meetings, then jump on another plane to Hong Kong, and do the same, before returning home.
Technology allows us to do these types of events online: we save time travelling, avoid the exhaustion that comes with being away from home, and reduce costs not needing expensive tickets and hotels. It works much better for a fraction of the cost and the effort.
Many other businesses have seen the same benefit and it’s likely they will keep using technology at a greater rate even after COVID-19. It’s cheaper and faster, from conducting meetings, giving handouts, following up with clients and recording important meetings for later.
And technology companies will likely benefit from this operational switch.
Daniel Ives, managing director of equity research at Wedbush Securities, said: “The largest tech companies could emerge on the other side of this much stronger.”
After the financial crisis in 2008, Apple emerged even stronger. There is no reason it and the other giants can’t do the same again.”
We’ve introduced a new investment designed to give you exposure to the US technology sector. It has a mechanism that allows you to patiently time your entry. If the market goes for a run now you won’t miss out on current lows, however, if we see another significant sell off over the next six months there is the opportunity to choose the lowest monthly close price as our entry value.
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