Therese Poletti’s Tech Tales: Tech’s COVID-19 boom won’t last forever, but it’s not going to end just yet

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This article is part of a series tracking the effects of the COVID-19 pandemic on major businesses. For other articles and earlier versions, go here.

The pandemic-fueled financial boom for technology giants is not going to last forever. For the rest of this year, though, tech will likely remain king.

As the COVID-19 pandemic forced shelter-in-place ordinances and kept people at home, they upgraded home offices, ordered more products than ever online — including restaurant takeout — taxed their companies network infrastructures and streamed movies and shows after work was over. Companies without cloud-computing options had to move quickly to support those far-flung workers, while others had to add capacity. People cooped up in small apartments moved or found escapes for sheltering in place online, at vacation homes within driving distance.

The end result was that growth expected for tech companies into the next few years was pushed into 2020 and part of 2021.

“The pandemic’s most enduring impact will be as an accelerant,” accelerating dynamics already present in society, wrote New York University Stern School of Business adjunct professor of marketing Scott Galloway, in his book last year, “Post Corona.” And acceleration was the key word for both young and early tech trends.

But the big question is whether that acceleration will lead to more growth or whether there’ll be an eventual drop-off after a phenomenal 2020. For now, it seems 2021 will continue the trend, but investors will want to keep a keen eye on earnings, revenue and forecasts to ensure that road doesn’t fall apart.

Tech companies will begin to release results for the first quarter ended March 31 next week, which will include nearly a full year of results affected by the global pandemic. They are expected to show continued strength in the overall information technology sector of the S&P 500
where companies are expected to see, on average, a 22% jump in earnings from the year-ago period, according to FactSet, compared with 30% earnings growth in the S&P 500 overall. After the first quarter, though, some companies are expected to see a tougher comparison with their first full quarters during the pandemic, when growth surged astonishingly for some.

Wall Street analysts expect earnings to rise 18% for the full year 2021 from 2020, when they grew 8%. The interactive services sector as a group, made up of Alphabet’s Google Inc., Facebook Inc.
and Twitter Inc.,

is forecast to see annual earnings rise nearly 20% in 2021, while Netflix Inc.

is expected to dominate the entertainment sector with 62% earnings growth in 2021.

“I think earnings will be very, very impressive,” said Brendan Connaughton, founder and managing partner, Catalyst Private Wealth in San Francisco. “What I think is even more impressive is that the revenue supporting tech is going to be through the roof.”

FactSet data indicates that average IT revenue is expected to grow nearly 16% for the first quarter, and 11% for the year. But by looking at separate sectors, a clearer picture begins to emerge of how tech has fared in the pandemic, during which much of the world has been working from home or keeping socially distant for over a year.

E-commerce keeps growing

The biggest growth is still happening in e-commerce, with more people than ever buying products online, and in cloud computing, which is supporting a more dispersed workforce. Inc.

is the biggest player in both of these arenas: It dominates electronic commerce, and Amazon Web Services is the leading provider of cloud-computing services. Amazon, which is in FactSet’s consumer discretionary sector and not part of IT, is expected to see full-year 2021 earnings grow 15%, after soaring 84% in 2020, when it also reported net income of $21.30 billion, as founder and outgoing Chief Executive Jeff Bezos noted in his annual shareholder letter. Revenue for 2021 is expected to grow 23%, after climbing 38% in 2020.

“Continued robust Prime penetration growth is a key factor supporting our ’21 Amazon e-commerce growth forecast, even as the company faces challenging comps starting in 2Q, a year after the pandemic shutdowns in March 2020 led to a surge in essentials products, among other categories,” said Cowen & Co. analyst John Blackledge, in a recent note to clients.

For the full year, Blackledge expects Amazon to report $473 billion in revenue, a 22.5% jump compared with 2020, and to achieve a 13.7% compounded annual growth rate over the next five years.

Amazon, Etsy Inc.

and Pinterest Inc.

are some of the companies dependent on e-commerce that are expected to see slightly slower growth rates during the rest of this year after reaching records in 2020. Etsy, the craft and vintage goods marketplace, saw revenue explode 111% to $1.7 billion in 2020, initially fueled by face mask purchases in the early days of the pandemic.

Ygal Arounian of Wedbush Securities believes Etsy is “well-positioned to hang on to its gains and continue to take share of e-commerce, particularly as e-commerce trends have become more entrenched with the length of the pandemic’s impact.” But even as shoppers continue to flock to the site, Etsy’s triple-digit revenue growth is expected to slow to 26% to $2.2 billion in 2021. Pinterest is forecast to see a very slight deceleration, with revenue expected to grow 47% to $2.5 billion in 2021, versus 48% growth in 2020.

Pandemic star Zoom’s stratospheric growth is also slowing down

One of the other big stars of the pandemic is Zoom Video Communications Inc.
which saw its revenue growth rate peak at 325% to $2.6 billion for the year ended January 2021, as employees working from home and students engaged in remote videoconferences. The company’s growth may be slowing but remains at an extraordinary pace, with forecasts for a 43% jump in revenue to $3.8 billion for the year ending January 2022.

On a quarterly basis, Zoom’s growth will begin to slow after its fiscal first quarter, ending April 30, when revenue growth will peak at about 176%, and then fall back into double-digit growth for the ensuing quarters.

The impending slowdown of its stratospheric growth has already been reflected in Zoom’s shares, which hit an all-time high of $559 last October, but are now trading at around $322. “We believe this slowdown in forward-looking metrics is inevitable given Zoom’s current scale, and while Zoom Phone will help offset a slowdown in Zoom Meetings growth, we believe current expectations already embed meaningful adoption of Zoom Phone,” said Brad Zelnick, an analyst at Credit Suisse, in a report in February.

The rise of Zoom and other video chats helped fuel hardware buys

One unexpected area of continued growth has been the still solid growth rate of personal computers, laptops and other hardware peripherals, such as monitors, large screens and camera equipment, as workers at home set up new offices, Zoom rooms and added new equipment to work from home. The real estate boom has also fueled more sales of hardware, as some urban dwellers moved to the suburbs or rural areas and set up home offices.

“I think we are still in a rebalancing,” said Maribel Lopez, principal analyst with Lopez Research. “Some people bought when they could get their hands on anything.”

On the corporate side, she said the other interesting dynamic is what companies will be doing as they reconfigure their offices for the partial return of their workforce in what is expected to be a hybrid situation across the globe. “More companies are starting to look at it, they are still trying to figure out what they need.” Lopez is an example of someone who left San Francisco and moved back to the East Coast to be closer to both sides of her family.

She added that the pandemic also brought the end of really stupid travel. “Organizations are now saying, we got a lot done without you doing any of that. There will be a lot more budgetary scrutiny on sales travel and events.”

Hardware still a hot commodity

“Even as the world opens up a lot of these accelerated trends around PCs will continue,” said Ryan Reith, an analyst at IDC Corp. “The commercial market for PCs has had a relatively strong cadence depending on refresh cycles.” IDC is looking for PCs to grow 18.2% in 2021, up from 12.9% in 2020, with consumers and students being the biggest drivers of demand.

In the first quarter of this year, PCs saw a massive 55.2% surge, called “staggering” by one Wall Street analyst. Reith pointed out, though, that the first quarter of 2020 was an “awful quarter,” and the beginning of when the world locked down.

HP Inc.

will likely see its revenue peak for fiscal 2021 in the quarter it already reported in February, based on FactSet estimates. For the full year fiscal 2021, HP is currently forecast to see revenue grow about 7% to $60.8 billion, its biggest growth since fiscal 2018, thanks to both boosts in PCs and its previously lagging printing business. The company’s printing and supplies business, a major profit engine for HP, has had a big resurgence in the last two quarters, as more consumers found the need for printers at home when they were not going to the office.

J.P. Morgan analyst Paul Coster, though, said that HP will also see tougher comparisons in the second half, reopening “should drive for commercial product.”

Apple Inc.

saw a boost from the pandemic, in its Macs and iPads, while iPhone sales declined for one quarter in fiscal 2020, as customers waited for the new 5G model. In fiscal 2020 ended September, Apple saw Mac sales jump 11%, while total iPhone sales fell 3%. This year, though, the growth engine will return to Apple’s biggest revenue generator, the iPhone. Buoyed by new models and 5G capabilities, iPhone revenue is predicted to climb 27% to $176 billion, while Mac sales will rise a much slimmer 6% for fiscal 2021.

Overall, that boost from new iPhones will propel Apple to much better revenue growth of 21.3% in fiscal 2021, compared with the paltry 5.5% in fiscal 2020.

Reith of IDC noted that Alphabet Inc.’s


Chromebooks also got a huge boost in the pandemic, with its lower prices appealing to the education market.

“Everyone understands there was a need for tech in the education market,” Reith said. “This [the pandemic] brought it to the forefront. Depending on where you are in the world, you may have things like sick days or snow days. Based on our conversations with suppliers and school districts, a lot of those are going to go away, and be replaced with remote learning days.”

PCs will start to slow down in the next year, though, with IDC predicting the compound annual growth rate of 2020 through 2025 at 2.5%.

Chip shortages hindering sales

One sector of tech that has been hurt by too much demand is the semiconductor industry, which is still reeling from a shortage of components and an inability to meet demand. Even so, many companies in the chip segment of the S&P 500 are expected to see revenue grow in the double digits in the first calendar quarter of 2021 and a few will also see those big gains on a full-year basis.

Among the companies expected to see the biggest jumps in revenue for the rest of the year are Advanced Micro Devices Inc.
with a big surge expected in its sales of chips for data centers, Applied Materials Inc.
the leading developer of equipment used to make more chips, Lam Research Corp.
another equipment maker, Nvidia Corp.

and Qualcomm Inc.

Intel Corp.
on the other hand, is one of the few companies expected to see a drop in revenue of nearly 8% in the first quarter, typically a slower quarter for the chip giant. Annually, analysts expect revenue to fall by about 7%, as it continues to lose some share in the desktop market and servers to AMD, amid the delays it has experienced in delivering new chips on the next-generation manufacturing process.

Chris Rolland, an analyst at Susquehanna Financial, recently noted that the company’s second half will see a slowdown in some products. “It appears Intel’s strong low-end notebook business (education, consumer) begins to fade into 2H [second half], with weakness mitigated somewhat by stronger data center and commercial PC. “

While underlying trends were generally encouraging for all chip makers, he said in another note, the second half of 2021 for semis in general will include questions about the sustainability of the demand environment, as supply shortages are hopefully alleviated during the year, and as working from home momentum subsides, he added.

Cloud computing and software will likely remain strong after accelerated moves

Dan Ives, a Wedbush Securities analyst, noted that there are many other tech companies that have benefited from the acceleration of tech trends in the pandemic like cloud computing, and will continue to benefit from a hybrid workforce model, even when some workers go back to the office, as more cities start to open up.

Cloud software companies such as collaborative messaging software developer Slack Technologies Inc.
, Inc.

and most companies in the cybersecurity arena will still see strong growth.

“Based on talking to all of our CEOs and surveys, 30% to 40% of employees will be in a remote situation, semi-permanently,” Ives said. “Before March 2020, it would have been viewed as impossible. Now into the pandemic, many companies are seeing workers more productive and more successful with a work-life balance.” Amazon, Microsoft Corp.’s

Alphabet’s Google Cloud continue to be the biggest beneficiaries from the move to more cloud computing.

“With more work in the hybrid cloud environment, there are massive security threats across the board, which is also a boom for cybersecurity,” Ives said. “These companies are going into a golden age of the cloud, even on the other side of the vaccine.”

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