Focus on Innovation
Target market segments poised to help shape a post-pandemic future
The COVID-19 pandemic has created a new trend line for our society. Amid enormous suffering and loss, social norms have been upended and the global world order has been materially changed in less than six months. Longer term, second derivative ─ or butterfly ─ effects of the pandemic have the potential to materially change technological, medical, social, manufacturing, policy and geopolitical trends. Not just for this generation, but for generations to come.
Given the global effort to improve testing, create treatments, find vaccines and practice social distancing, we hope that the apex of the curve is behind us. As reopening and rebuilding begin, new industries will be created and current ones will work to adjust to a new sociological paradigm. This inflection point may present opportunities that are not currently well represented in traditional market exposures.
Innovation Inflection Point
Technological innovation will be at the forefront of reshaping our way of life. It will touch every industry and be the catalyst for new ones. We are likely to see demand for advanced medicine, improved structural health care processes, and remote access capabilities to support reduced-contact interactions. There is likely to be a tectonic shift in our daily routines and how we consume media. Digital payments will become more standard, while video games, streaming networks, virtual reality, social media and interactive home workout equipment will likely move from being “discretionary” items to “staples” in the future.
While the potential for innovation will be broad-based, these four themes in a post-COVID-19 world may be the most transcendent:
Software Solutions to Support Daily Life
Remote access, cloud storage, and internet-based solutions were strong secular trends before COVID-19. During the pandemic, however, the use of internet-1 and software-2 based solutions significantly increased for some platforms, and IDC expects that even with a decline in spending on IT solutions, the persistent need for storage will fuel an 18% post-COVID-19 annual growth rate of installed storage capacity through 2024.3
A more digitally connected world, however, will require software to function. We see software as the backbone of our new society, just as the highway-building public works project coincided with the broad-based adoption of the automobile and transformed post-World War II America. As a result, software and service firms are likely to benefit from this seismic shift in corporate and consumer behavior across a variety of dimensions: video conferencing, e-learning, telehealth, project and document management, closed-system social communication tools, cloud technologies, digital payments, and cyber security.
This generation-defining shift is one reason why earnings for software firms are expected to grow at 18% per annum over the next three to five years ─ compared with a 10% growth rate for the broader market. And, software firms are not expected to see material declines throughout the rest of 2020 and 2021. In fact, as shown below, while the S&P 500 is projected to have negative sales growth over the remaining three quarters of this year, software and services firms are projected to continue to grow their top line each quarter. Valuations are a bit above their long-term average for the industry,4 but with a lack of growth in our current environment, the premium for a growth industry with the potential to reshape society is warranted.