Is the Pandemic Accelerating Digital Disruption?

The coronavirus pandemic has been a disruptor unlike any seen in decades, forcing sweeping changes to how people live and work.

Technology, media and telecommunication—industries that as a whole touch nearly a third of U.S. GDP—have largely stepped in to fill the void caused by social distancing, allowing us to stay connected, shop from home and keep businesses operating.

This increased reliance on digital has been a wake-up call for businesses to accelerate digital transformation in order to drive greater resiliency and innovation in the face of COVID-19 challenges.

In a recent report, Morgan Stanley Research equity analysts across the TMT space note this historic inflection point, highlighting a dozen secular technology themes that could benefit from accelerating disruption, including contactless payments, automation, and increased use of workplace collaboration tools.

“These technology themes were under way before the pandemic, but the need to digitally connect with employees and customers has now fast-tracked adoption to a point of no return—especially in e-commerce and public cloud usage," says Katy Huberty, head of North American technology hardware equity research. “This digital disruption will likely expand to more segments of the market, broadening stock market performance to more digital leaders, and driving structurally higher levels of technology investment.”

Here are five selected technology themes that will likely see rapid acceleration (for the full list, see the report below):

As more employees continue to work from home—with an estimated 40%-50% of workers remaining remote through at least the second half of 2020—a Morgan Stanley AlphaWise survey of chief financial officers and/or chief operating officers shows that spending on external digital collaboration tools could experience sustained growth, with 52% of respondents noting that increases in cloud-communication spend. Although the report notes that about 15% of cloud-communication spend could disappear when workers begin returning to their offices, about 30% of that spend could become permanent.

While a number of categories, such as project management and messaging, could grow their share of IT spend, video conferencing was the strongest category, with 40% of survey respondents indicating long-term increased spend.

The pandemic has led to rapid e-commerce growth and greater adoption of contactless payments in the past few months, fueling a material shift in payments from cash to credit cards. Adoption has also increased offline, since touch-free, cash-free payments reduce exposure to the virus and drive adoption as a safer alternative for in-store transactions.

While the analysts do expect some return to normal payment behavior post-pandemic, they note that a shift to digital payments is likely to become permanent, serving as a longer-term tailwind for the sector. They also expect rapid e-commerce growth to persist, resulting in an overall increase of 25% in 2020.

The travails of the pandemic have also accelerated IT investment in what Huberty calls “The Data Decade," a 10-year investment cycle that turns on technologies such as artificial intelligence, machine learning, automation, digitalization and the internet of things. Companies across sectors now see the need to leverage data and digitally engage with customers, partners and employees to improve their competitive advantage, productivity and profitability.

While the digitalization of workflow solutions was well under way before COVID-19, it’s notable that the pandemic has accelerated this shift in industries that have typically been slow to adapt to new technology such as the insurance and legal industries. The report finds that investors may be rewarding companies that invest in technology to thrive, vs. those who are putting off IT investment. 

The printing market has been in decline for the past five years, but COVID-19 could hasten this trend longer-term, pushing print vendors toward alternative sources of revenue or consolidation. This dynamic is driving permanent changes to the $210 billion global printing industry, across hardware, supplies and services.

Office printing needs could also decline more rapidly, as work-from-home and flexible working arrangements persist post-pandemic. Similarly, school printing needs have dropped due to virtual learning for millions of students.

For investors, the opportunities may come from technology vendors focused on the shift to digitization of business processes, such as electronic signature and document-management solutions.

Social-distancing measures have heightened the need to enhance remote interaction. This could help expand use cases for augmented- and virtual-reality tools, both in the consumer and enterprise arenas.

IDC, a market intelligence group for the tech industry, expects an 87% compound annual growth rate in total AR/VR spending over the next four years, reaching $128 billion by 2023. The report notes that, although some market participants still view AR/VR as a niche technology for the consumer gaming market, the arrival of COVID-19 suggests newfound potential in several markets, such as healthcare, retail, real estate and education.

For more Morgan Stanley Research on the outlook for the technology, media and telecommunications sectors, ask your Morgan Stanley representative or Financial Advisor for the full report, “Technology Eating the World: Top Trends Post COVID-19" (Jun 17, 2020). Plus, more Ideas from Morgan Stanley's thought leaders.