Here’s part two of a two-part piece on tech predictions for the new year. Part one was published yesterday and can be found here.
11. High Stock Prices and Cheap Debt Drive a Flurry of Tech M&A
We’ve already seen a handful of large-cap tech companies whose shares have run up a lot in 2020 use their stock to partly or fully finance major acquisitions -- think deals such as Nvidia-Arm, AMD-Xilinx and Salesforce-Slack. Look for more such deals to be announced in the first half of 2021.
Also, with interest rates for investment-grade corporate debt still at rock-bottom levels, debt-financed acquisitions of relatively cheap tech companies should also be a common sight. And judging by some recent activity, the same might hold true for private equity deals to buy software firms carrying low or moderate multiples.
12. Gaming Activity and Spending Slump a Bit
Following a year in which tens of millions of consumers either took up gaming or increased their gaming activity as they dealt with COVID lockdowns, the gaming industry’s long-term foundations look as strong as ever.
But the current state of affairs -- one in which game sales have risen sharply and new game consoles and high-end graphics cards are selling at 50%-plus premiums to their list prices -- feels unsustainable beyond the very near-term. Look for a mean-reversion of sorts to happen as COVID vaccines lead both consumer leisure time and spending to shift back towards outdoor activities.
13. Amazon Prime Sees Another Price Hike
Some of the reasons why I think Amazon is likely to raise Prime’s annual fee by $10-$20 in 2021 are: Macro conditions are likely to improve next year; usage rates for both Prime’s e-commerce and content services appear to have risen sharply in 2020; and since its last price hike, Amazon has spent a fortune to grow Prime’s value proposition, spending heavily on expanding 1-day delivery, rolling out grocery delivery and pharmacy services, expanding Prime Video’s content library and much else.
14. Public Cloud Growth Rates Accelerate
The public cloud market’s Big 3 -- Amazon Web Services (AWS), Microsoft (MSFT) - Get Report Azure and the Google (GOOGL) - Get Report Cloud Platform (GCP), in that order -- continued seeing strong double-digit growth in 2020. However, revenue growth rates were pressured a bit by weaker spending among some clients in COVID-affected industries, even as contract backlogs continued rising at very healthy clips, as numerous firms made strategic decisions to rely more heavily on cloud infrastructures going forward.
Next year, revenue growth rates look poised to accelerate some as revenue is recognized from a chunk of that backlog, spending improves within COVID-impacted industries and additional large contracts are inked.
15. Mac Sales Surge
Thanks in large part to a spike in notebook purchases made to support remote work and learning, Apple’s (AAPL) - Get Report Mac sales have been up strongly the last two quarters. And with many companies set to allow a lot of their workers to continue working remotely long-term, this notebook upgrade cycle looks far from over.
Just as importantly for Apple, the rollout of Macs powered by its own processors should -- judging by the performance and battery life improvements delivered by Macs powered by Apple’s M1 SoC -- drive additional upgrades and maybe also an uptick in consumers switching from Windows. High-end Macs powered by Apple SoCs will reportedly arrive in the spring and fall of 2021.
16. Microsoft Emerges as the Clear Leader in Cloud and Subscription Gaming Services
Microsoft (MSFT) - Get Report has built a pretty solid library for its xCloud gaming platform, which is bundled with its $15-per-month Xbox Game Pass Ultimate service, but for now, only works on Android devices. In the spring of 2021, however, xCloud will begin supporting Windows PCs and (via mobile web browsers) iOS devices, with Xbox support expected to arrive later.
Meanwhile, Microsoft’s pending deal to acquire game publisher Bethesda Softworks will add a slew of popular franchises to xCloud, as well as Xbox Game Pass’ game-download libraries. Throw in Microsoft’s ability to bundle its Xbox Live Gold service with Game Pass Ultimate, and its planned bundling of Electronic Arts’ (EA) - Get Report EA Play game-download service with Xbox Game Pass for PC and Ultimate, and Game Pass looks poised to emerge as a marquee cloud and subscription gaming franchise.
17. Zoom Becomes the New Slack
Slack (WORK) - Get Report has been posting 30%-plus annual sales growth since it went public in mid-2019. However, with growth rates moderating a bit in 2020 and worries about Microsoft Teams’ momentum weighing heavily on investors’ minds, Slack was trading well below where it was on its first day as a public company when reports emerged in November that Salesforce.com (CRM) - Get Report is looking to buy the company.
I think Zoom (ZM) - Get Report could be in for a similar type of multiple compression/narrative shift in 2021. Zoom should remain a market leader and continue growing next year, even if growth rates will inevitably fall from current levels as annual comps get tougher and offices and schools start reopening. But intensifying competition -- both from Microsoft Teams and to a lesser extent other rivals that have overhauled their video offerings, such as Google and RingCentral (RNG) - Get Report -- will weigh on Zoom’s currently-steep valuation and investor perceptions of its growth runway.
18. Podcast and OTT Video Advertising Hit Inflection Points
Major advertisers tend to revamp their spending plans near the start of each year, taking into account how various advertising channels trended and performed in the prior year before setting budgets. Snap (SNAP) - Get Report was a clear beneficiary of this in 2020.
Spotify’s (SPOT) - Get Report budding podcast advertising business, which has been fleshed out over the last couple of years with the help of acquisitions and original content deals, should be a 2021 beneficiary. So should over-the-top (OTT) streaming advertising players -- think firms such as Roku (ROKU) - Get Report and The Trade Desk (TTD) - Get Report -- as advertisers respond to cord-cutting, lower TV ratings and efforts by OTT platforms to improve targeting and measurement by moving a larger portion of their video ad spend online.
19. T-Mobile Sees More 5G Home Broadband Traction Than Verizon
T-Mobile US (TMUS) - Get Report and Verizon (VZ) - Get Report are taking very different approaches to roll out 5G home broadband services. Verizon has been providing services using a high-frequency mmWave spectrum that can deliver very high speeds over short distances. T-Mobile, which recently launched a 4G home broadband pilot service ahead of a planned 5G launch in 2021, is instead relying on the traditional, sub-6GHz mobile spectrum, which in practice yields lower speeds but much broader coverage.
Assuming it launches before late 2021, I’m expecting T-Mobile’s service to see stronger uptake next year. Two years after it first launched, Verizon’s mmWave service is still believed to cover less than 1% of all Americans due to mmWave’s range limitations, with service unavailable even to many homes within neighborhoods said by Verizon to be covered. And though T-Mobile’s service will probably deliver real-life download speeds in the tens of megabits per second rather than the hundreds (as Verizon’s often does), that might be good enough for many consumers in places where broadband services are currently limited and/or expensive.
20. Tech Giants Step Up Their Stock Buybacks -- Particularly if Markets Slump
Generally speaking, U.S. tech giants still possess large net cash balances and are throwing off plenty of free cash flow (FCF). Moreover, the companies can all raise debt at very low rates, and antitrust scrutiny is clearly limiting how much M&A some of them are willing to engage in.
All of that gives the tech giants strong incentives to buy back their stock more aggressively next year. And if a market downturn leads the forward EPS and FCF multiples of the tech giants to drop a bit, that creates one more incentive to buy back stock.