To some extent, the demand jumps that many tech companies are seeing right now are due to consumer and/or business activity that would have never taken place if not for COVID-19, and is thus a clear-cut positive for the company's long-term value.
And to some extent, the elevated demand seen by many of these companies simply represents a pulling forward of consumer and/or business activity that would have otherwise taken place at a later date.
Netflix (NFLX) is one company that has a good understanding of this. While Reed Hastings & Co. reported a stunning 15.77 million streaming subscriber net adds for Q1 (blowing away guidance of 7 million), they also cautioned that some of their lockdown-driven growth "will turn out to be pull-forward from [Netflix's] multi-year organic growth trend, resulting in slower growth after the lockdown is lifted country-by-country."
Along similar lines, Netflix admitted that "the person who didn't join Netflix during the entire confinement is not likely to join soon after the confinement."
Streaming services aren't by any means the area where some demand could be getting pulled forward right now. Others include:
- E-commerce and payments solutions. While some of the businesses that have begun using platforms such as Shopify (SHOP) and Wix (WIX) over the last couple of months to start selling online might have never done so otherwise, others probably would have joined at a later date. Likewise, some of the consumers who have recently set up accounts for payments platforms such as PayPal (PYPL) , Venmo or Square's (SQ) Cash App might have done so down the line.
- Cloud capital spending. This is a field where spending and digestion cycles have been the norm for a long time. A new spending cycle started in late 2019 and (judging by commentary from the likes of Intel (INTC) , AMD (AMD) and Samsung) has gotten a boost from investments made to support spikes in digital content consumption and remote work/learning activity. However, assuming that these traffic spikes at least partially reverse, some of the capex spent to support them will amount to a pulling forward of investments that would have been made later to support future traffic growth.
- Enterprise software. To the extent that COVID-19 drives secular changes in the amount of remote work activity that happens, the new business picked up by companies such as Zoom (ZM) , Slack (WORK) and Twilio (TWLO) is a long-term positive. But some of the elevated spending growth seen in areas such as collaboration, communications and security software likely represents an acceleration of IT investments that were going to happen in time.
- Notebooks and other consumer electronics. A portion of the sales jumps recently seen for consumer tech and electronics hardware stems from purchases that would have never been made if not for remote work/learning needs and/or stimulus payments. But there's also probably some pull-forward at work -- particularly for products that many consumers upgrade every few to several years, such as notebooks, tablets and TV sets.
It's worth stressing here that for all of these industries and end-markets, the debate over whether new demand represents a pull-forward as opposed to genuine market expansion isn't an either-or one. In many cases, both phenomena seem to be at play.
But considering how much the shares of many of the tech companies that are seeing elevated demand right now have rallied, investors shouldn't lose sight of how those companies that are seeing a lot of demand pulled forward right now could eventually see growth cool.