Today, let’s talk about winners and losers from the coronavirus epidemic. Prior to getting into some fun speculation, let’s quickly remark that in a general sense, we’re all losers. People are sick, some have died, and the economic damage to many has been real. We’re in no way trivializing the very real, troublesome elements of this current reality. But today our goal winners and losers in the sense of which industries, businesses and investments might outperform and which ones might underperform. By discussing this, perhaps it can help investors identify some businesses and stocks to own in the aftermath of the 2020 stock market crash.
Few industries were impacted as immediately and severely as travel-related businesses over the last month or two. Cruise lines, hotels and airlines have seen demand drop to extraordinary levels putting many of these businesses at risk. But what are the long-term implications?
Even after much of normal life returns, will travel bounce back? You could argue that travel will be one of the last areas to bounce back to pre-coronavirus levels. Is it possible that we saw peak leisure travel recently with the rise of Instagram-fueled photography and a good economy? Maybe for a while, but I’d bet that the leisure travel space will bounce back even if it takes a while.
The more concerning space, to me, seems to be the business travel space. Companies are being forced to work and collaborate remotely and as the virus scare continues, more and more individuals are getting used to working via digital collaboration tools such as Slack (WORK), Zoom (ZM) and others. Will businesses take a harder look at travel expenses even when the pandemic subsides? It seems logical.
At-Home & On-Demand
The at-home & on-demand revolution was already in full swing prior to the word coronavirus becoming a regular part of our vocabulary. But boy has it taken a swift acceleration forward with things such as quarantine and “shelter in place.” As the outside world of commerce has either been turned off or altered dramatically, many areas of our lives have become more centered at the home… everything from education, work, entertainment, food and more. And boy are there a lot of ways we can dissect this.
We’ve already talked about remote work solutions, so we will skip that, but obviously these tools are important as millions work from home. But digital connectivity in general is a trend worth mentioning. Despite a rough few years serving as the focus of much political angst, social networks are likely winners on the other side of this event. Social media has served to be a very important tool in conveying information during this pandemic, and while it’s certainly susceptible to alarmist viewpoints, stupid opinions and potentially even dangerous projections and calculations, social media isn’t alone in being susceptible to this kind of content. Cable news and mainstream outlets such as the New York Times are full of inaccurate predictions and alarmist headlines similar to those found on Facebook and Twitter. Ben Thompson of Stratechery did a nice job outlining how early discussion on Twitter led to significant action before the coronavirus was a mainstream story in the U.S.
Now before you go out and buy Facebook (FB) stock, remember that Facebook serves as an interesting barometer of economic and business activity due to its dominance in online advertising. The company has already made it known that advertising revenues are down dramatically with the current economic shut down. As such, Facebook’s revenues are likely to suffer in the short term. But, like many in digital media, usage is likely increasing. As economic activity increases after the virus fears subside, Facebook is likely to reap much of the benefit.
We’re seeing the rise of digital and social media versions of many things we used to enjoy in person. Musicians are performing concerts on YouTube. Pastors are giving Bible studies via Instagram TV. Seeing all the ways our lives and connectivity are shifting to the online and digital world is quite fascinating.
The connectivity leads directly to the accelerating on-demand world that spans both digital and physical goods. Obviously Netflix and other streaming providers are clear winners in a world where declining traditional cable viewing is even worse with the suspension of live sports. Can you imagine how upset executives at Warner Media and other soon-to-be-released streaming services are that they didn’t get their service out to the public before the coronavirus? Streaming usage is skyrocketing as millions hang out at home each night.
Perhaps the accelerating trend of on-demand physical goods is more interesting. Obviously Amazon (AMZN) is the dominant player, but companies like Instacart have seen a major boost as millions opt for grocery delivery rather than venture into crowded retail stores. Restaurants have been forced to turn to take-out and delivery only as in-restaurant eating is suspended, and a big part of me wonders how this affects the restaurant industry long-term.
Will we see a rise of restaurants that are take-out and delivery only? There’s a term called “cloud kitchens” that could become more relevant. If you’re a chef and want to start a restaurant (which have extremely high failure rates), why not start with a brand, an online presence and a delivery/take-out only business? Renting space in a “cloud kitchen” could be much less risky than a full restaurant build out.
It’s not altogether different from the rise of AWS. For years, technology startups had to raise money just to buy the hardware and servers to launch their new website or digital app or service. Today, these same companies can ramp up “space” on an AWS server for a fraction of the cost in minutes and then scale up as usage increases. Or perhaps the more low-tech example of a hair dresser renting a chair from a salon rather than building out an entire salon himself.
With respect to fitness, Peloton (PTON) has had a great run and led the charge in connected, in-home fitness. Again, this seems like a logical trend to continue in light of current circumstances.
Lastly, if we’re spending more time at home, what about home renovation? It seems logical that individuals would be investing in their homes to make them more comfortable, more useful and more versatile to accomodate more parts of our lives. Home Depot (HD) and Lowes (LOW) can benefit from the trend, but note that these companies will also rise and fall with the overall health of the residential real estate market.
What about the losers of the at-home & on-demand trend? Clearly, it’s places such as malls and movie theaters and possibly restaurants. This could have dramatic effects in the commercial real estate space. While retail and office space seem to be logical long-term losers of this trend, industrial space could shine as more and more space is used to power the on-demand economy (think Amazon fulfillment centers but not just for Amazon… more and more niches and other services will need industrial space to store goods, sort them and power delivery).
Education has been and will continue to be ripe for disruption. Two scenarios are extremely interesting to me…
First, let’s say you’re paying $75,000 a year for your kid to attend Vanderbilt University (a great school), but now your kid is sitting at your home in Tampa, Florida watching classes online. How long can that continue before the folks footing the bill start to grumble about the value being delivered in exchange for nearly $100k in tuition?
Second, millions of kids are being homeschooled all of a sudden as schools at every level have closed in much of the country in response to the coronavirus.
Let’s discuss each of these briefly and consider potential downstream effects.
The value proposition of much of higher education has been suspect to many for years now. Perhaps the trigger of sending countless college kids home in the middle of the semester is a big enough event to push the system into some significant change.
As has been documented, the costs of a college education have gotten completely ridiculous while the quality of education has either stagnated or declined. While I still see tremendous value in the idea of a college degree, the delivery and costs of such a degree need to evolve.
I personally took a year of graduate level computer science classes through Georgia Tech’s online program (about 30% of a Master’s degree) and it cost me about $2500. Do the math and you can get a Master’s degree in computer science from a top computer science program for less than $8,000. I never stepped foot on the campus, and the quality of the courses were excellent. Why isn’t this the norm?
I think the answer, partly, is because change is tough. It requires a trigger (pandemic?). Also, there’s still a considerable stigma around the idea of getting an “online degree.” Perhaps the bigger change that occurs in the coronavirus aftermath is that the line is removed separating a “college degree” and an “online college degree.”
Speaking of stigma… homeschooling has had a stigma surrounding it for decades. Often mostly limited to highly religious or rural families, homeschooling has not always had approval from a large segment of society. This is likely also to decline as a result of millions of families experiencing distance learning and homeschooling during this unusual time.
So, I’m extremely bullish on technology enabling high quality education to be distributed online at every level of education from kindergarten through college level material as well as continuing education topics for professionals. While prestigious universities and colleges that offer an above average education at medium or below average tuition rates (there are some great state schools with decent in-state tuition levels) will be with us for a long time, I’m bearish on the idea that a college education is going to look the same for a chunk of people as it has for decades. Whether it’s disease prevention, ballooning tuition costs, the college loan crisis or the increasing availability of college degrees online from reputable universities, there will be a different path for many students in the future.
While a number of niche businesses can and will rise to serve the needs of digital distribution of education, it’s a safe bet that the big technology giants will be a major part as well. Amazon’s AWS cloud platform and Microsoft’s (MSFT) Azure cloud platform will continue to dominate.