I keep getting notes about the bargains in tech and telecom stocks, followed by the promise that stocks could dip another 30%. I keep seeing stories about how we could hit 20% or 30% unemployment, which would surely make anything you’d pay for almost any stock today the furthest thing from a bargain. The recovery will be “V” shaped, or maybe “U” or “W” shaped, or maybe it will be the great depression all over again. We need to avoid overreacting, or we need to start taking this seriously. The nice thing about all this is that you can find support for any viewpoint you like out there, somewhere. Nearly all of them, of course, will turn out to be wrong. What should a company do, in the tech or telecom space, to plan for an optimum response?
Starting with the facts would be nice, but the truth is that we don’t have many to work with. What we have with COVID is a dangerous disease, but not a deadly one. The problem is that we don’t really know much about how it spreads, and because we haven’t had good systematic testing of populations as well as potential victims, we don’t even know how many people have it, which means we’re judging the disease almost totally by the population who have had enough symptoms or reasons for testing to have qualified. In the US, with about 40,000 cases and 455 deaths, we have a fatality rate of about 1.1%, but that’s not definitive because we don’t know how many people are actually infected.
A piece I saw this AM said that there were now estimated to eleven times the number of cases that have been reported. This morning I saw that there were about 340 thousand cases worldwide, with roughly 15 thousand deaths. If we assume that 11x multiplier to account for non-symptomatic victims, that would mean there are already three and three-quarter million cases. The fatality rate would then be (neglecting disease timing) about 0.4%, which isn’t much worse than a bad flu season. The problem is that we can’t make that assumption. If the rate is more like the 2% to 3% level some say it is, and if a conservative 40% of the population were to get it, then we could see three million deaths in the US, compared to perhaps 40 thousand from seasonal flu.
The business impact of COVID is created not by the disease but by our steps to contain its spread, given that for now we have neither vaccine nor treatment. Closing businesses and enforcing social distancing has the effect of not only impacting buyer confidence, but also direct sale of goods and services. That means a reduction in spending by the companies who produce and sell goods and provide services, which of course then daisy-chains through the economy at large. The impact of that depends on how deep the decline in the economy overall is, and how long it lasts.
I tried to run my model, which many of you know is based on buyer behavior, to see how various things might play out. Here’s what I found.
First, the assumptions. The direct impact of COVID is, as I’ve said, largely due to containment efforts, meaning closing of stores, suspension of flights, broader business closing, social distancing, and so forth. These hit as soon as the measures are imposed, and the result is first a loss of revenue from reduced sales, and second the layoff of workers, which then reduces their ability and willingness to spend, further hitting company revenues. The indirect impact is the fear factor, the conservatism in buyers as they face a situation that’s at least unfamiliar and perhaps even downright scary. These play out over time, and here’s what the modeling says.
Even a complete closure of retail businesses and services for about a month would have a minimal long-term impact on companies. Credit issues could develop, both for individual (particularly SMBs) businesses, and systemically, but these can likely be weathered for a short period, particularly with central bank support like we’re seeing. We could expect that if we were able to safely suspend restrictions, and that there were no reversals in the positive trend in cases created by this lifting of social distancing, we would expect a “V” recovery.
From a tech industry perspective, the 1-month scenario would create a spurt of interest in WFH technology and general conferencing, lasting several months, but this would likely taper off. Budgets for remote work products and services would be increased slightly for 2020. IT spending and network spending for the year would see relatively little impact, and so the key in positioning would be to promote approaches to empowerment that could be implemented quickly and with modest carrying cost. Think SaaS strategies versus product or perpetual license approaches.
A shutdown of around two months would create a growing number of small business failures, and it would also begin to impact the supply chains. Consumer confidence would take a strong hit at this point, and the impact would likely affect buying behaviors for several months beyond. As we’re coming into summer, vacation plans that had to be suspended would create a psychological impact at the least, and if travel insurance or forbearance on the part of companies didn’t refund the charges, chances are that vacations and their associated revenues would be lost. Many would cancel early, taking no chance they’d lose the money.
Overall, this is the point at which we could call things a “U” recovery. We could expect both Q1 and Q2 GDP to take a hit, with most in Q2. The stimulus packages being proposed would have to aim at this 60-day point, with the goal of improving confidence and also sustaining stock prices. Companies will likely accept some hit in share prices if they have confidence that there will be stimulus, but should that fail to happen, then a continued decline in stock prices would almost surely trigger larger and larger layoffs.
The biggest tech impact of this scenario would be in education, primary and secondary schools. A two-month shutdown will close schools long enough to have compromised education for the school year, and there will be considerable interest in deploying technology to permit mass home schooling (where that’s not already possible). This is likely to look a lot like the web-meeting technology, with some controls and changes to suit classroom social behaviors.
The two-month scenario, having greater impact, would surely raise interest in remote work overall, and begin to generate opportunities for solutions that allowed companies to create “jobspaces” that were virtual and portable, but these would have to be in a form that could evolve from the short-term tactics of the 1-month approach, given that during the early product/service assessment phase, buyers wouldn’t know that the impact of the virus would last beyond the first month. Economic pressure on companies would be enough to cause them to reduce their spending, and we so all capital budgets would be reduced for the entire year. Unless a vaccine were to be made widely available by year’s end, 2021 budgets would also be cut.
Service providers, in contrast, would likely pull the trigger on modest network expansion programs, and even though a recovery at this point could eliminate the need, most think they’d likely go forward with the programs in the event that the virus reappeared in the fall, which is possible. For network vendors, this could make the service provider space the sweet spot.
Cloud providers could also see a sharper uptick in their own sales, as companies will be reluctant to commit to capital programs for IT expansion, preferring a cloud/service option. Some cloud providers think this could create a longer-term shift to the cloud, and are gaming out pricing scenarios to match it.
At the three-month point, we don’t really have any nice graphic-letter example to describe the recovery. At this point, we can expect that enough small businesses would have failed, and even some franchise operations, and this will impact retail real estate and put greater stress on the credit markets through defaults. Again, a stimulus package could help, but by this point consumer confidence and behavior would likely change even in the longer term. The economic impact of the virus would extend well into the fall, easing only around the first of 2021. Stock prices would be unable to recover their early-2020 levels, devaluing 401Ks and IRAs, and impacting those who depend on them for income.
At this point, GDP for the entire year is likely to take a hit. Three months from now is only early summer, and if it takes that long to get over the current virus phase, the risk of a fall outbreak will surely suspend interest in travel, and wage and income losses in the three months will cramp consumers for the balance of the year when combined with their fear the virus will start up again in the fall. Restaurants, travel, and entertainment will take much longer to recover in this scenario, and so the economic damage will now extend into Q3, which will then fall into negative growth as well. Enterprises will surely cut their overall 2020 spending and put a conservative slant on 2021 spending as well.
Network operators may now face a more serious level of pressure. If consumers continue to stay at home and network demands aren’t reduced, more spending for capacity may be required, and price wars on broadband and TV may also be forthcoming. While network services aren’t typically as hard-hit in a downturn as capital spending, there still may be pressure to downsize home TV, network, and even wireless plans.
The cloud providers would be the bright spot here, since businesses will cut their capital budgets and hold off on any projects that involve capex. On the other hand, tactical business services, especially SaaS, will look very smart if they can take up the slack and perhaps even offer a market advantage.
And finally, we come to the case where the virus isn’t contained in four or more months. Now, candidly, things start to look bad. There is little chance that if we have no response to the virus in four months, we’d have credible reason to believe it wouldn’t kick off even worse in the fall, or simply continue to get worse until a vaccine was validated. That would mean a sharp economic decline, and the analogy to the Great Depression might seem valid. I don’t think it will be quite like that, even if the virus worst-case happens. There’s too much government can do to pull things out, and so what we could expect is several years of very anemic growth.
Which of these scenarios will we see? I wish I had an answer to that, but because we lack so much basic data on the virus, I’ve got nothing concrete to feed into the modeling. Is there a risk that the economic impact of our attempts to mitigate the spread of the virus will be worse than the disease? Surely, and there’s also a risk that the virus, even with the current measures in place, will eventually create a massive death rate. We can’t know which risk is greater at this point, or tell where in that spectrum any specific decisions on lifting or imposing restrictions will fall.
One thing that’s clear to me is that we need to take better advantage of our virtual-world capabilities. We already live in two realities, our real world and a network-integrated social framework we loosely call “online”. There have been only limited attempts to somehow integrate these two, to allow one of the worlds to influence or augment or even replace the other. We should learn a lesson here, and take the time to think this through. We still don’t know how COVID will play out, and how many COVID-like events we can expect down the road.