Bright Future For Tech Stocks in Post-Covid World

Bright Future For Tech Stocks in Post-Covid World

On 9 November 2020, Pfizer announced a wonderful development for mankind. Trial results from the pharmaceutical giant’s COVID-19 vaccine candidate, developed together with Bio NTech, showed that it could be 90% effective in preventing infection. A week later, Moderna revealed that its COVID-19 vaccine candidate was 94.5% effective in trials. This was followed by an update from Pfizer a few days later that its vaccine candidate was actually 95% effective.

COVID-19 is still a serious global health threat. Pfizer’s and Moderna’s vaccines have yet to pass regulatory approvals at the time of writing (19 November 2020). Both companies have said too that they can supply their respective vaccines at scale only in 2021. Pfizer’s vaccine candidate also poses a significant logistical challenge since it needs to be transported and stored at an extremely cold temperature of minus 70 degrees celsius.

But, we can at least see some light at the end of the tunnel now.

A celebration – for some

The stock market welcomed Pfizer’s announcement. In the USA, the S&P 500 index was up by as much as 3.9% in the next trading session following the release of Pfizer’s vaccine trial data, before closing with a 1.2% gain. Singapore’s stock market barometer, the Straits Times Index, climbed by 3.7%.

But the warm reception did not extend to all corners of the market. The stock price of e-signature specialist DocuSign sank by 14.7% despite the S&P 500’s 1.2% gain. There were also painful drops of 13.6% and 17.4%, respectively, in the stock prices of e-commerce software provider Shopify and video conferencing platform Zoom Video Communications. These are just some examples of the sharp stock price declines that many US-listed technology companies faced immediately after Pfizer shared the great news about its COVID-19 vaccine trial.

The future for tech stocks?

COVID-19 has led to restrictions on human movement in many countries around the world. As a result, many technology companies have benefitted as their products help people to live, work, play, and consume better from home. In late April this year, Microsoft’s CEO Satya Nadella famously said that he saw “two years’ worth of digital transformation happening in two months.” As a microcosm of what happened with technology companies, DocuSign, Shopify, and Zoom saw their stock prices jump by between 133% and 577% from the start of 2020 to the end of October.

If Pfizer and Moderna’s vaccines are as effective as their trial results suggest, then COVID-19 could cease to be a worry for society in the near future. Technology companies would then lose a powerful tailwind. This train of thought, along with the sharp difference in the movement of the broader market and technology stocks that I mentioned earlier after Pfizer’s announcement, may have led many investors to the following question: Should we invest in technology stocks in the post-COVID world?

Better question

From my perspective, many of the technology companies whose stock prices have been pummelled after Pfizer’s good news are creating or riding on powerful long-term trends.

For instance, before COVID-19, DocuSign was already providing e-signatures to a growing number of companies. Retail merchants were already flocking to Shopify in droves to create an online or omnichannel retail presence to meet consumer demand. A large and growing number of people and companies were already experiencing the joys of a well-built video conferencing app through Zoom. From 2017 to 2019, DocuSign’s customer base increased by 57% from 373,000 to 585,000; Shopify’s merchant base jumped by two-thirds from 609,000 to over 1 million; and Zoom’s customers with more than 10 employees tripled from 25,800 to 81,900. The trio, and many other technology companies, were growing before COVID-19 because their products and services are superior to how things are done traditionally.

When we’ve solved COVID-19, will the advantages that these technology companies have over the traditional ways still hold? I humbly suggest that this is the better question to ask, compared to “should we invest in technology stocks in the post-COVID world.” This is because it hones us in on a key driver of a company’s stock price over the long run: Its business performance. Answering this better question can help us determine if any particular technology company’s product or service will enjoy growing demand in the years ahead. With growing demand comes a higher chance of earning higher revenue, profit, and cash flow.

You will need to figure out your own answer to the better question, but my reply to it is “yes.” Will companies really stop their digital transformation and be content with or revert back to more archaic ways of conducting their business simply because the threat of COVID-19 has been removed? I doubt so.

What lies ahead

Some technology companies aren’t worth investing in because they already or will struggle to grow their businesses meaningfully over the long run. The trick lies in separating the wheat from the chaff.

Technology stocks could also be in for more pain in the months or even the next one or two years ahead. Short-term stock price movements are unpredictable. But as a long-term investor, I’m focused on what the businesses of technology stocks could look like five to 10 years from now. And for me, the future looks bright, with or without COVID-19.

Note: An earlier version of this article appeared in The Business Times.

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Disclaimer: Chong Ser Jing has a vested interest in DocuSign, Microsoft, Shopify, and Zoom Video Communications.