Though many tech companies are seeing their sales hold up well amid the COVID-19 pandemic, the situation is likely to change if the recovery from the sharp economic downturn that's currently taking place proves to be more gradual than rapid.
Take chip developers such as Intel (INTC) , AMD (AMD) , Nvidia (NVDA) and Micron (MU) , for example. For now, these companies are benefiting from both strong laptop demand (fueled by new telecommuters who are in need of hardware upgrades) and strong cloud data center capital spending (fueled in part by strong traffic/user growth for many popular apps and services).
But in the event that the current lockdown period is followed by a subdued economic recovery thanks to issues such as high unemployment, an oil price crash and cautious behavior among consumers still worried about COVID-19, these companies will probably see a variety of sales pressures. Consumer PC and graphics card upgrade activity would probably get hit, and so would enterprise PC and server upgrade activity.
Amazon.com (AMZN) -- though seeing its competitive position strengthen in a variety of ways during this crisis period -- also wouldn't be unscathed. Depressed discretionary consumer spending would weigh on Amazon's sales of everything from apparel to electronics to furniture. And while Amazon Web Services (AWS) could benefit from an acceleration in the long-term shift towards public cloud usage relative to on-premise IT investments, it would also be hurt by reduced spending on discretionary IT projects, as well as diminished funding for startups that are building their businesses on top of AWS.
Likewise, though their reliance on recurring subscription payments rather than up-front software license sales helps protect their top lines during a recession, cloud/SaaS software firms such as Salesforce.com (CRM) , Workday (WDAY) and ServiceNow (NOW) -- a group that still collectively sports elevated multiples -- would see sales pressures as well.
In addition to seeing new deal signings slow, many of these companies would face company-specific pressures due to depressed economic activity. If a company is employing fewer sales and marketing people, it will probably need fewer Salesforce software seats. And if an enterprise's total headcount has meaningfully dropped, that will likely impact its usage of Workday's human capital management (HCM) software.
Hopefully, for both economic and humanitarian reasons, this thought exercise ends up being nothing more than that. Hopefully, COVID-19's spread slows enough in the coming weeks for lockdowns in the U.S. and elsewhere to be significantly eased by early-to-mid May, and (with the help of aggressive Fed and fiscal stimulus actions) we see economic activity bounce strongly in the weeks and months that follow.
But at a time when it's still not too hard to find high trailing sales, billings, EPS and free cash flow multiples among tech companies that were seeing rapid growth going into February, investors should be mindful that a lot of multiple compression could occur for more richly-valued names if markets start concluding that COVID-19's economic impact will remain pronounced for more than a short amount of time.