Our lives are now completely in the cradle they’ve stitched together: online, on-demand, self-service, mobile, social, streaming, virtual, and cloudcentric. Many of these vendors have also made major investments in AI, automation, robotics, edge computing, and the Internet of Things. These are all key enablers for a world where we won’t need to see, touch, or otherwise interact closely with other human beings. The FAANGs and similar vendors will emerge into a tech marketplace in which vendors that weren’t prepared for this structural dislocation will have succumbed to COVID-19.
On the other hand, customers may have become so worn out by social distancing that in-person social intimacy (brick-and-mortar retail, big splashy physical events, travel for business and pleasure) will come back in vogue, thereby neutralizing the structural advantage enjoyed by the FAANGs.
Weathering COVID-19-induced frictional unemployment
Frictional unemployment comes when many out-of-work people spend inordinate amounts of time searching for new jobs. Often, this happens when bottlenecks or inefficiencies in the job marketplace make it difficult for people to find jobs suited to their skills and compensation requirements, even though those positions may be abundant.
As regards businesses, frictional issues pop up when companies have to take more time than normal to secure the necessary cash to stay above water in tough economic conditions. As the present crisis begins to wane, the tech firms that had healthy cash positions going in, or that currently have ready access to credit and other funding to keep going will bounce back fastest. They can hire, invest in new operating capital, and otherwise grow to meet what’s sure to be a lot of pent-up demand from frustrated customers.
Fortunately for us all, the COVID-19 crisis comes at the end of the longest bull market in history. More to the point, it comes at the end of a long period of full employment. That means many households are sitting on a lot of cash. Hence, the investment community will not need to search too hard to find enough capital to fund whatever firms have survived the crisis and are ready to get back to work. Once again, the FAANGs and kindred should be in a great position, considering how incredibly cash-rich they already are.
There is a clear warning sign on the horizon for those that depend heavily on revenues from selling digital ads. In a recent Wall Street Journal article, Facebook reported significantly higher usage of its products and services during the COVID-19 crisis. However, it is also seeing significant declines in digital advertising across the globe. Furthermore, it isn’t monetizing many of the services that experienced increased engagement, which boosts their overhead expenses without corresponding top-line growth.
For its part, Google parent Alphabet reports that many of its biggest advertising customers have significantly scaled back their outlays for online ads. This is a foreboding signal for the firm, which relies almost entirely on online advertising and is acutely vulnerable to any structural industry shift away from ad-supported business models.
Hunkering down during COVID-19-triggered cyclical unemployment
Cyclical unemployment comes when there is not enough aggregate demand in the economy to provide jobs for everyone who wants to work. Often, this happens in a recession when credit becomes tight, the stock market has crashed, the money supply contracts suddenly, and other macroeconomic factors gang up to suppress aggregate demand severely over a long period.
Whether a tech company can offset any COVID-19-triggered cyclical downturn depends on how well it weathers the structural and frictional challenges noted above. It also depends on whether it maintains a healthy enough balance sheet (such as by avoiding excessive debt financing) during this emergency and in the immediate aftermath.
Another cyclical recovery factor is whether it can retain enough valuable assets on its balance sheet during the worst of the crisis. If the going gets tough and it drains its cash reserves, it can bounce back effectively if it can sell or leverage key assets in order to raise the cash necessary to stay above water till the cyclical tide buoys it up again.
Once again, the FAANGs and similar firms have clear strengths here as well. The period we’re going through amply demonstrates the value of cloud, digital, streaming, edge, artificial intelligence, and other digital transformation technologies.
Even if ad and subscription revenues dry up during the COVID-19 crisis (a highly unlikely, worst-case scenario), all of these firms have a treasure trove of valuable products and services that they could conceivably liquidate in a pinch. Cash is king, especially in a time when the stock market is severely depressed and consumers are holding their breath, waiting for the all-clear.
You could do worse than bet on the FAANGs to emerge from this nastiness stronger and better positioned to dominate global business for years to come.