What Will be Different Post-Coronavirus?
If you’re like me, you’ve been constantly reading up on the spread of COVID-19. Are a million people going to die? Is the hospital system going to collapse? Are we self-inducing an economic disaster? As we come up with different scenarios and do back-of-the-napkin math on virality and growth rates, the only thing that is certain is uncertainty.
Nobody, not even the experts with all the real-time knowledge, knows exactly what will happen next (if you think you know, you’re lying to yourself). We all fear the unknown. This is why we are constantly glued to our information providers; because we want someone, anyone, to tell us what’s next.
So, what is certain? Well, for starters, everyone that isn’t essential to the health and/or food supply chains will be (or, is supposed to be) isolated from all other humans. Flatten the curve, yadda-yadda-yadda, all that good stuff. This is a giant change for everyone except Mark Zuckerberg. And it will last for two weeks up to potentially six months(!).
What I also understand is, that, the longer this isolation lasts, whatever affects it has on society will continue to amplify. Let’s try and forecast what some of these changes might be, and how they will alter the business and investing world.
Please note: just because I am talking about investing in the face of a pandemic, does not mean I have no empathy for the people affected by it.
Okay, first, some easy ones.
Zoom Video and WFH
It’s unreal how popular Zoom has become for people working from home (WFH). The simplicity, reliability, and robustness of the product make it great for anyone to use and has become the default for workplaces adjusting to the quarantine. I have no idea who is running Skype, but they should be fired immediately.
Take a look at Zoom’s Google trends data for the past five years:
Have any guesses for when the global pandemic started?
There will likely be a slight decrease in demand once the quarantine is lifted, but I believe this forced WFH made everyone realize Zoom is a necessity for any business. Wall Street has figured this out as well. Zoom’s stock has basically doubled in the past few months and now trades at a sales ratio of 49 and a market cap of $30 billion.
I personally don’t love the company as an investment, especially at these levels, but do think they could be a $100 billion company someday. Everyone knows this though, so I really don’t see how I would have an edge investing in them.
The killer WFH merger is Slack and Zoom. The combined entity would be worth $50 billion and would be a fantastic subscription combo. Or, Microsoft could just buy both and make them a part of Office 365.
Other long-term winners from this quarantine will be virtual enterprise tools (i.e. SaaS) like MongoDB, Blackline, DocuSign, Okta, etc. Antiquated on-premise software is even harder to use when WFH, making these browser-based cloud platforms the clear choice for businesses in a decentralized society (anyone with direct experience with either type of product, please correct me if I’m wrong).
The one concern with this WFH trend, anecdotally at least, is that people are already saying they miss going into the office. There is likely some truth to that. I believe people will want the option of going into the office in the future, even if they are not obligated to do so. However, we also should note that typically WFH does not mean you are literally trapped in your house.
Thought of by many and popularized by Andrew Yang, universal basic income (UBI) is having a moment right now. Traditional UBI was a policy sending $1000 a month (or more, or less) to every U.S. citizen. Now, politicians want to use it to backstop laid-off workers and small-business owners during this coronavirus crisis.
And these are the highest-ranking members of a Republican-led administration. Republicans who have traditionally scoffed at the idea of giving $1,000 a month to every American, calling it a socialist idea. Now it is the only thing everyone can agree on.
So, every American is now getting a $1,000, and a family of four is getting $3,000. The first-order effect is quite obvious: it will put money into consumers’ pockets. But what about the second-order effects?
How will this change consumer habits? Will a good portion of people become dependent upon this money, creating a socialized consumer economy? Or will this be the revitalization the middle class was looking for? Either way, we’re going to know soon what scaled UBI means. I for one hope and think it will be a good thing. And I think we can conclude it is a necessity during this lockdown. But don’t underplay this. If implemented on a perpetual basis, UBI is a giant fundamental shift in how our economy works, and with certain unknown unknowns to come with it. As an investor, there’s not much you can really prepare for.
When you’re sick with a highly-viral disease, you don’t want to come in contact with anyone else, especially a doctor. That’s why virtual doctors, or telemedicine, are vital. Like Zoom Video, there has been a growth in the popularity of telehealth services during this outbreak.
Here is one example a mainstream publication we all know, the Today Show:
The largest telehealth company is Teladoc. They have seen a huge boost from the pandemic, and shares are now up almost 100% since the start of the outbreak.
Virtual healthcare was already a growing industry pre-coronavirus (Teladoc has been growing revenue by 25% annually), but is now a mainstream phenomenon. Nobody wants to go into the doctor’s office unless absolutely necessary, and the more telemedicine grows, the more they won’t have to.
There aren’t any strange long-term effects of telemedicine I can think of. Just know that a good portion of the healthcare industry will transition, like everything else in society, to a more convenient virtual offering.
I am a huge advocate for investing in the War on Cash or the transition from paper money to digital transactions. This includes credit cards from Visa, Mastercard, and Amex, and P2P transactions from Venmo and the Cash App.
This transition was already in full swing (people under 30 rarely carry physical dollars anymore), but the pandemic has made it almost mandatory to transact virtually. For example, here is an article from the Maryland Transportation regulators on why they are making toll booths cash-free.
I’ve also seen a few examples in my personal life, from golf courses to grocery stores, of businesses requiring customers to go cashless to mitigate the virus from spreading. No doubt this will force customers to adopt the modern cashless forms of payment and P2P transactions, benefitting the businesses/services listed above.
We are almost certainly in a recession right now. This means that, for the next 3 to 18(?) months, spending will likely be down across all sectors of the economy. This will negatively impact payments companies in the short-run. But in the long-run, a surge in the percentage of people who use these products will have a positive impact.
A quick final note. If/when UBI gets implemented, it will almost assuredly boost payment volumes through these networks. Assuming take rates stay constant, growth in payment volume equals growth in sales, which should hopefully trickle down to the bottom line.
Just in Time Manufacturing
I don’t have an MBA and have never worked a corporate job, so I apologize if you think I am just pontificating on a subject with no expertise. But I’m going to do it anyway.
Here is the definition of Just in Time (JIT) according to Investopedia:
“The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders from suppliers directly with production schedules. Companies employ this inventory strategy to increase efficiency and decrease waste by receiving goods only as they need them for the production process, which reduces inventory costs. This method requires producers to forecast demand accurately.”
In theory, this makes a lot of sense. Assuming the global system will be running smoothly (and why not, it basically has since 1945), managers love nothing more than raising operating margins by 10 basis points. Profits go up for the entire company, that $5,000 bonus comes in the mail, everyone goes home happy.
For a lot of large corporations, this has led them to one conclusion: centralized manufacturing in China. But with the recent pandemic, a lot of them may be rethinking these efficiency strategies.
If executives believe slowdowns/stoppages like this will happen again, we will likely see:
Increased manufacturing diversity, which will…
Decrease China’s importance to the manufacturing economy, but also…
Decrease profit margins for large American businesses. However…
Businesses with strong crisis contingencies will enjoy higher valuation multiples, partially offsetting losses in profits
I hope that makes logical sense. There’s also the slowly increasing tension between the Chinese Communist Party (CCP) and the U.S. government, which will make corporations hesitant to rely slowly on the country. I believe it is wise to check what, if any, exposure your investment portfolio has to China.
Mental Health Crisis
What does being stuck inside for two straight months do to our state of being? We already know increased use of social media correlates to an increased chance of depression, especially for teenage girls. How much will that be amplified during a prolonged quarantine experiment?
I hope I’m wrong, but there is a strong possibility we see a spike in depression and suicides during this time. Again, I hope it doesn’t happen, but think it is likely.
If this does happen, increased regulatory pressure will be put on Facebook and its subsidiary apps WhatsApp and Instagram. Twitter and Snapchat too. Society will not put up with services that at one end contribute to the destruction of democracy and on the other make Generation Z mentally sick. At some point, the rubber will meet the road, and the free ride Facebook and others have been on will end. Maybe it isn’t soon, but it will happen. Eventually.
Since the end of World War II, America has regulated the global economy through its Navy and reserve currency. The Navy secures the waterways for global shipping, and the currency allows nations to safely transact with one another. It’s obviously more complicated than that, but those are the two most important facets that have led to a growth in globalization over the last 75 years.
In Peter Ziehan’s new book Disunited Nations, he discusses why this American led “Global Order” is coming to an end. I tend to agree with him. Populist leaders are back in full force, singing the tune of slogans like “America First” to a growing number of followers. And this is global too, not just in the U.S.
If this trend continues and eventually boils over, there will be HUGE implications for public companies. I’d recommend reading the whole book because it goes over every major country in minute detail, but here is an interesting excerpt:
“Whether the year is 1850, 1945, or 2020, America’s position is unparalleled. It is the rest of the world that has changed.
That is a problem. It isn’t so much that things have changed under the Order, but why things have changed. The Order’s imposition granted places the world over the ability to do one of two things: import food from abroad without first seizing control of someone else’s food-producing territory, and/or shrug off foreign control and import the various inputs required to produce food themselves. These options are largely responsible for the fourfold expansion in food cultivation since 1946 and thus also the tripling of the global population.”
Countries decoupling from the American global order (plus America caring less and less about foreign policy) could have negative effects on companies benefitting from globalization. That would include international restaurant chains (ex. Mcdonalds), hardware manufacturers (ex. Apple), and import/export companies. Relying on global supply chains is tough when certain parts of the globe aren’t cooperating with each other.
If you are skeptical this is happening, or that the pandemic will accelerate the trend, read this article on what the White House wants to accuse the CCP of doing.
The other side of de-globalization, and something I hope can be a net benefit to society, is an increase in localized consumption. Think farmers markets, locally sourced food, small businesses, etc. I shop at my local food co-op (yes, humblebrag, you caught me), and find it an immensely better experience at about 125% of the cost of the chain grocery store. Plus, I get to be a part-owner of a thriving small business where I live.
With this outbreak, young people are going to realize living in metropolitan areas is not what it’s cracked up to be, and start spreading out to the burbs. Hopefully, and maybe I’m naive here, they will start investing in their local communities. Less Lululemon, Wal-Mart, and Nike and more small businesses that will help bring back the American middle class.
Another scenario, and one I think is equally likely to happen, is big tech (Microsoft, Facebook, Amazon, Google, and Apple) coming out of this economic crisis stronger, and basically running the economy. Man would that suck.
Alright, we’ve made it to the end. Thank you if you are one of the few people who read this whole thing and good luck to your health/investments in this volatile time.
Disclosure: The author is not a financial advisor, and may have an interest in the companies discussed.