The technology sector was a strong outperformer during the bull market and, so far, is outperforming other sectors during the current downturn. At a recent Goldman Sachs Asset Management (GSAM) Forum discussion, Sung Cho and Greg Tuorto, portfolio managers on GSAM’s Fundamental Equity team specializing in technology, and David Fischkoff on GSAM Fixed Income’s credit team, shared their perspectives on why the sector is poised to weather the current crises.
The tech sector was one of the only categories that has seen inflows this year, amid strong client interest, and has held up relatively well during the sell-off. What are the dynamics at play?
Sung Cho: The big tech companies are likely to remain relatively unscathed—and may even emerge stronger than ever—as they benefit from the work-from-home, play-at-home and deliver-to-home tailwinds. With millions of people sheltering in place, they’re deepening their reliance on services from the tech industry’s largest companies. Meanwhile, the tech sector, which has already benefited by holding significant amounts of net cash, is also seeing more of its revenues come from recurring sources. In software, for example, more than 80% of the subsectors’ revenues are recurring, up from about 60% in the financial crisis. In fact, it’s likely that coming out of the crisis, we could see an acceleration of some of the secular tailwinds that have already been underway, notably the adoption of the public cloud and further e-commerce penetration.
What subsectors of technology are likely to be most affected by changes in consumers’ behaviors during this period?
Greg Tuorto: Software will be critically important in the way we emerge from the downturn. Some companies, for example, are standardizing the way people are communicating. Other companies that support data centers, whose supply chains are intact, are relatively insulated from the downturn given that internet providers are expanding their data capacity daily to keep up with demand. To be sure, software companies aren’t entirely immune to a softening in demand and a drop in new business activity, but we expect customer turnover to remain low.
Are there other potential headwinds due to weaker consumer demand?
David Fischkoff: We expect that smartphone shipment volumes will be challenged due to weaker consumer demand, supply chain issues and challenging logistics given store closures. This ripples downstream to component suppliers, such as semiconductor manufacturers. We also expect companies to be careful with spending for at least the balance of 2020, which drives a cautious outlook for enterprise IT spending, server companies and, to a lesser extent, software-as-a-service companies. Instead, we believe companies with subscription-based models that have more resiliency in downturns, cloud-focused companies, and digital payments are better positioned.
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