Following a tumultuous 2020, 2021 might also be a pretty volatile year for the tech sector and the financial markets that it leans on.
1. A Reckoning Arrives for Many Bubble Stocks
Sooner or later -- and quite possibly sooner -- the speculative frenzy surrounding select clean energy, consumer tech and enterprise software stocks is coming to a bitter end.
It could happen in January when financial pros return to work following the holidays and companies share their 2021 outlooks during earnings season. Or it could take a little longer. But a lot of the recent speculation in tech stocks bid to the moon and beyond does feel very late-stage, and it’s quite hard to imagine the fervor lasting through the end of 2021.
Of the three aforementioned types of tech companies, high-multiple enterprise software names probably have the best odds of a soft landing, given that business could remain strong for many of them through year’s end. That said, when a mania ends, markets often aren’t too particular about the relative strength of the companies involved.
2. A Second (Potentially Smaller) Frenzy Emerges for Reopening Plays
As COVID vaccines become widely available, a lot of the pent-up demand that exists right now for activities such as taking vacations, frequenting bars and restaurants, and attending live concerts and sporting events could get unleashed in a hurry. And if it does, it’s easy to see retail investors pouring into shares of the companies seeing their sales inflect thanks to this phenomenon -- think of names such as Uber (UBER) - Get Report, Lyft (LYFT) - Get Report, Eventbrite (EB) - Get Report and Groupon (GRPN) - Get Report, not to mention many non-tech companies.
That said, if much or all of the current bubble has already burst, that’s likely to limit how much enthusiasm there is for partaking in another mania. And if the unleashing of all that consumer demand results in an inflation spike that causes the Fed to become more hawkish, that too would keep a lid on how much multiple inflation goes on.
3. Intel Reveals Plans to Outsource Some High-End CPU Production to Foundries
Intel said in July -- after pushing back ETAs for PC and server CPUs made using its next-gen, 7nm, manufacturing process node -- that it would lean more on foundries for manufacturing in the coming years. And the company later promised to share more details about where future products will be made during its January earnings call.
Look for Intel to outline plans to have some of its most powerful PC and server CPUs made by foundries (TSMC (TSM) - Get Report and/or Samsung) in 2022 and 2023, as it tries to stay competitive with both AMD (AMD) - Get Report and Arm CPU developers in spite of its 7nm delay.
4. AMD Starts Getting More PC and Server CPU Traction with Global 2000-Type Enterprises
One of my 2020 tech predictions (#5) was that AMD would see strong server CPU momentum with internet/cloud giants, but more limited traction with traditional enterprises. That more or less held true. But for a few reasons, AMD could do better with enterprises in 2021, even though Intel will remain the clear share leader in this space.
First, AMD’s soon-to-launch third-gen Epyc server CPUs (Milan) will deliver large performance gains for single-threaded workloads, which for many enterprises account for a large portion of their server computing needs. Second, the strength of AMD’s CPU roadmap, together with Intel’s 7nm issues, could lead some enterprises to finally rethink their age-old loyalty to Intel. Third, growing cloud infrastructure adoption among enterprises arguably works in AMD’s favor, since it allows companies historically loyal to Intel to give AMD CPUs a spin without making large hardware commitments.
Look for AMD to also see a measure of additional traction in the corporate PC market -- particularly in the desktop PC space, where it has opened up clear price/performance and power efficiency leads at many price points.
5. Arm Server CPUs See Adoption Inflect with Internet/Cloud Firms, but Not With Traditional Enterprises
What was true for AMD’s Epyc CPUs in 2020 might be true for Arm server CPUs in 2021. With Arm CPUs increasingly quite competitive relative to Intel and AMD’s x86 CPUs when running certain workloads and also often faring well in terms of power efficiency, interest has been growing among both hyperscalers and smaller internet/cloud firms such as Twitter (TWTR) - Get Report and Netflix (NFLX) - Get Report. That interest looks poised to inflect higher in 2021.
On the other hand, the fact that Arm server CPUs still have a much smaller developer ecosystem than their x86 counterparts, together with the cautious approach that many businesses take when it comes to embracing a new silicon architecture, will limit their uptake among traditional enterprises.
6. Tech Antitrust Remains More Bark Than Bite for the Time Being
Some of the major tech antitrust cases currently underway -- think the DOJ’s suit against Google (GOOG) - Get Report over its search practices, or the FTC’s suit against Facebook over the Instagram and WhatsApp acquisitions -- will likely take years to play out, with any initial adverse rulings almost guaranteed to be appealed.
And some of the cases that could be resolved sooner -- think Epic Games’ suit against Apple (AAPL) - Get Report over its App Store policies -- are ones that might not do massive financial damage to the defendant and/or which the defendant has a decent chance of winning.
As a result, the impact of tech antitrust battles in 2021 might largely revolve around how antitrust heat influences the decision-making of the tech giants -- for example, deterring certain M&A transactions or driving policy changes meant to appease consumers and regulators -- than around legal rulings.
7. Consumer Hardware Sales Cool Off...and Trigger a Second-Half Chip Inventory Correction
As consumer spending starts shifting back towards things such as travel, dining and live events, look for many of the consumer electronics and tech hardware markets that have seen strong demand in recent months to cool off considerably. Hardware sales tied to remote work activity (think sales of notebooks or PC peripherals) might hold up relatively well, but demand for more discretionary items (think gaming hardware or TV sets) are likely to see major growth rate declines.
And lower spending on consumer hardware naturally spells lower demand for the chips going inside of this hardware. So with many chip-buyers ordering aggressively right now as they contend with tight supplies and stretched lead times, the stage appears set for an inventory correction to happen during the back half of the year.
8. Smaller Streaming Players Evaluate Their Options
In some ways, AT&T T/WarnerMedia’s recent decision to make their entire 2021 movie slate immediately available both via HBO Max and movie theaters was a wake-up call about the tough spot that streaming players not named Netflix (NFLX) - Get Report, Amazon.com (AMZN) - Get Report or Disney (DIS) - Get Report are in right now, as they contend with a market where many consumers already have three or more subscription streaming services and scale matters a lot.
Therefore, look for some of the smaller players in this space -- think names such as CBS (CBS.A) - Get Report (All Access) and Comcast (CMCSA) - Get Report/NBCUniversal (Peacock) -- to start taking a hard look at whether their content is best-monetized through being offered on their own streaming services, as opposed to being licensed to third parties.
9. China Trade Tensions Ease, but Don’t Fully Go Away
The arrival of a Biden Administration should lead to some cooling of trade tensions between Washington and Beijing. As a result, we’re less likely to see actions such as the Huawei, SMIC and DJI parts export restrictions that were imposed by the Trump Administration, which in turn might make Chinese regulators more willing to sign off on tech M&A transactions.
But there is still a lot of bipartisan support for taking a harder line against China on a variety of economic and non-economic issues, as well as for reducing U.S. dependence on Chinese manufacturing. And China, for its part, is still intent on trying to lower its dependence on U.S. silicon and software. All of that pretty much guarantees that U.S.-China tensions will remain a hot-button issue for the tech sector for the foreseeable future.
10. Companies Invest Heavily in Connecting Office Workers with Remote Workers
In 2020, businesses were focused on figuring out how to stay up and running while most or all of their white-collar employees worked from home. In 2021, the focus will often be on supporting a work environment in which a portion of those employees have returned to the office, while others continue working remotely some or all of the time.
That’s often going to require major investments in office videoconferencing gear, and sometimes (as Cisco Systems (CSCO) - Get Report has argued) in corporate network upgrades. At times, it might also require new security investments, in order to guarantee remote workers have secure access to corporate networks and data.
Predictions 11-20 can be found here.