Despite the fact that the impact of COVID-19 and the expected recession has far reaching implications, a sector which may offer interesting opportunities is the internet sector. The internet has grown to encompass a diverse range of businesses and underlying exposures, therefore individual company selection remain key at this point.
While the human and economic impact of COVID-19 is massive and far more important, the degree to which this crisis will serve to accelerate the adoption of new technologies, drive eCommerce share gains, and transform the online media and advertising industries seems difficult to understate.
By way of example, Amazon Inc. made headlines on Tuesday for its share price reaching an all-time high in the midst of arguably the worst global crisis of our generation, now dubbed Corona Crisis. This was mainly attributed to the recent explosion in the company’s online grocery business.
In short, the key is to identify businesses that have strong balance sheets, and ongoing revenue streams despite the crisis, such as Alphabet, Netflix and Paypal. Elsewhere though, travel and leisure and real estate such as Expedia and TripAdvisor are examples of companies which should be avoided at this stage.
Opportunities are being created due to a sharp increase in online engagement. This has been promulgated by the need to stay at home. Streaming services, social media, and online education, which are each large and mature categories, have all seen significant acceleration in traffic growth and time spent. For subscription services like Netflix, it is safe to assume a large boost to subscriber net additions will be material and sustainable given the stickiness of these services and the disruption to the production schedules and live events at competitive services.
For ad supported services like Alphabet, Facebook and Twitter, while there is a significant disruption to revenues as advertisers freeze spend, analysts are arguing that the increase in online engagement is creating long-term incremental ad inventory that will be positive as advertising resources will be allocated more favourably.
It is almost inevitable that eCommerce be considered as the most defensive/attractive sub-segment within the Internet sector since the shutdown of brick and mortar retail stores in many parts of the world has pushed people to go online. Even notoriously impacted retail companies such as Inditex and Next, who have an established online shopping store, are well positioned to benefit, mitigating at least in part the effect of the crisis. Investments currently being made in infrastructure and delivery could lead to a massive competitive advantage beyond the crisis.
The demand for and the development of new technologies has seen the emergence and explosion in the number of users for home technologies like Zoom and its emerging role as a social network has been the most notable example of the acceleration of technological adoption, within the internet sector. Zoom recently experienced security issues related to privacy concerns, which highlights the continued importance of internet security companies as an attractive sub-segment of the internet sector.
Also the explosion of at home fitness, most notably Peloton, will be sustained by 63 million gym members in the US that are likely to be slow to return given ongoing health concerns. Similarly online dating services have seen increased usage (Tinder’s length of conversations have reportedly grown +10-30%) and accelerated adoption of new features, such as live video.
Beyond direct economic impacts, there is the question whether going forward we are at the dawn of a new way of living with the potential for a more sustained preference for ‘work-from-home’. This will have long term implications for several businesses, highlighting the importance of the value of management execution, financial flexibility, and the ability to innovate; with household names like Amazon and Netflix set to benefit the most as well as any potential new technologies that service the industry.
This article was issued by Simon Psaila, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice
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