In the early days of the pandemic, a sense of euphoria overwhelmed the technology sector. Billions of people were locked in their homes, and work and leisure moved online. Many expected the new normal to trigger a huge productivity boom as businesses go digital and workers spend less time commuting. The enthusiasm was more than evident in the stock markets, where any company related to that trend saw its share price soar. The value of an equally weighted portfolio of five pandemic favorites (what we might call the “lockdown madness index”) rose 320% from the start of the pandemic to its peak in August 2021. By contrast, the Nasdaq, with its big tech heavyweights, it only increased 88%.
The fever has disappeared. Today, the lockdown madness index (comprising Netflix, a streaming service; Peloton, a maker of fancy exercise bikes; Robinhood, a stock trading app; Shopify, an e-commerce platform; and Zoom, a company of video conferencing) has fallen more than 80% from its peak and far exceeds the 18% drop in the Nasdaq. Zoom and his friends are trading below pre-pandemic prices.
How worrying is this return to Earth? Certainly, in part, it reflects the more pessimistic outlook for the world economy, buffeted by inflation, war and rising interest rates. And it is disappointing that two years of digitization and remote working have not provided clear evidence of a productivity boom. However, there are still reasons to be techno-optimistic. Much of the initial enthusiasm may have been focused on the wrong kind of companies. As much as the favorites of the pandemic have run out of steam, the shift towards greater digitization continues. The real winners are not the flashiest consumer technology companies, but the ones that provide the infrastructure that enables that change.
Much of the decline in our lockdown index reflects unstable business models. On August 22, Zoom reported that its year-over-year revenue growth had fallen to 8%, the lowest rate since the company went public in 2019. Three days later, Peloton reported a nearly 30% drop in its quarterly sales compared to a year ago. Subscribers are abandoning Netflix in favor of other viewing platforms, such as Disney. Robinhood is laying off a quarter of its staff as day traders lose weight in the markets.
The end of the telecommuting boom has also affected the demand for hardware. This year global PC shipments are expected to decline 10%; analysts estimate that mobile phone sales will fall by 7%. Declining spending on video games and a series of implosions in the cryptocurrency sector have dented sales of the powerful semiconductors used to mine digital currencies and digitally render graphics.
However, if we look beyond the rise and fall of consumer technology, we discover the real success stories. The market for infrastructure technology that supports people’s daily lives, such as cloud computing, cybersecurity and digital payments, is thriving. The cloud computing sector is expected to grow this year to nearly $500 billion from $243 billion in 2019. Amazon’s cloud offering, the world’s largest, continues to grow at 33% a year. It has accounted for three-quarters of the company’s operating income in the last 12 months and is propping up the tech giant’s ailing e-commerce business. Its closest rivals are cloud services from Microsoft and Google, whose annual sales are growing 40% and 36%, respectively.
Cloudification has created new demands related to cybersecurity, another of the technological winners. The combined revenue of the three largest publicly traded cybersecurity companies has almost doubled since the start of the pandemic. Its market capitalization has tripled, and is only down a fraction since the beginning of the year. Digital payments are another sector favored by lockdowns and social distancing. Three-quarters of iPhone owners use Apple Pay, up from half in 2019; and nine out of ten US businesses now accept it as a payment method. In India and China, almost 200 million people have used some form of digital payment for the first time since the start of covid. In sub-Saharan Africa, a third of adults now have a mobile money account, up from just a fifth in 2017.
The bubble of favorites during the pandemic may have burst, but the pace of digitization continues. The real beneficiaries of covid are those less flashy technologies that provide the underlying infrastructure for change. Whether they will one day boost productivity remains to be seen. In any case, during the pandemic there was not only madness in confinement.
