Big Tech Prepares to Emerge Stronger from the Pandemic

Huge profits. Mountains of cash. Hundreds of millions of users. Must-have products and services.

It’s no surprise that Alphabet, Amazon, Apple, Facebook and Microsoft can survive a pandemic. Tech stocks overall have roared to new highs in recent days. Netflix has scooped up millions of new subscribers. Zoom has surged to new heights. Many tech companies are flying high.

What may be a little more unexpected is how powerful tech giants will be in a post-pandemic world, and not just because competitors are weaker and promising startups go bust.

The COVID-19 outbreak has supercharged one area of IT that was already thriving: The cloud, a segment where sales soar some 30% year-over-year as businesses and governments buy remote computing horsepower and storage that they tap into via high-speed internet connections.

The sudden rush to work from home after the onset of the outbreak led to a surge of investment in digital tech. “We have seen two years’ worth of digital transformation in two months,” said Microsoft’s CEO Satya Nadella on a company earnings call last month, citing a sudden spike in users of its video meeting and collaboration software, Microsoft Teams, for schools, hospitals and other businesses. Over the longer term, Microsoft sees the current environment as a tailwind for its business.

The pandemic cemented the fact that cloud computing is not optional anymore. It is a fundamental cost of doing business, operating a government, or running a school. “The cloud is integral to business operations and service providers must maintain datacenter and network performance,” says Stephen Minton, a vice president at market research firm IDC who focuses on IT spending.

Keep in mind that the technology industry overall won’t escape the economic crisis. Global spending on information technology could fall this year by 10% or more as companies put tech projects on ice and consumer demand sinks for gadgets, such as smartphones. Even Microsoft and Apple aren’t immune to the global downturn. Business closures hurt demand for Microsoft’s work software, and the financial hardship of millions of consumers lowers demand for iPhones. Meanwhile, Facebook and Alphabet, reliant on advertising, will suffer as advertising budgets dry up.

But once the recovery gains steam, businesses that are hunkering down to conserve cash will dive headfirst into digital projects. That means upgrading ecommerce websites, plowing more money into digital marketing, and upgrading online collaboration software. It also means more businesses and governments will ditch their own datacenters for the ease and flexibility of the cloud, especially Amazon’s AWS cloud system.

The coronavirus has accelerated a digital shift that will be with us for years. “In general, I would say the highest-level opportunity is across everywhere,” said Sundar Pichai, Alphabet’s CEO, when asked about the pandemic at the company’s recent earnings call. “We see businesses thinking deeper about the shift to digital.” Apple’s CEO Tim Cook noted that lockdowns led many people to discover that they could work and learn remotely. “I think we have significant solutions and products for all of those groups,” he said.

Such comments are par for the course during an earnings call, of course. But they are jarring when other large companies underscore future worries and uncertainties of this unprecedented situation. What’s more, I think these tech CEOs might even be underselling how well-positioned they are for the future.

Plenty of other tech companies are selling shovels in a gold rush. Intel and Nvidia are seeing strong sales of computer chips that power datacenters. Wired and wireless carriers are seeing higher demand for faster and better internet service. More computing power and faster connections create more opportunities for digital startups to harness artificial intelligence, superfast 5G and other advances.

After the virus is vanquished, tech giants will seem insurmountable. Lawmakers in Washington will look harder at ways to rein in big tech for abuses of market power and misdeeds related to privacy. Some of those efforts could lead to strong regulations, but it will take years and won’t curb tech profits much.

However, the tech leaders of today aren’t set in stone. I still think there’s plenty of room for disruption. The history of technology is one of seemingly invincible companies being disrupted by upstarts. The old guard fails to react to a major technology shift or makes a disastrous bet. Sometimes the shift is sudden; other times it’s a slow decline. The key is studying the impact of powerful trends and paying close attention to emerging technologies that matter.

That’s not to say it will be easy to take on today’s behemoths. But the seeds of future hit digital products and services are being planted today as tech entrepreneurs survey a new world hammered by a once-in-a-generation pandemic. Right now, coders are working on better videoconferencing software, education tools and much more. There’s still space for the next big social media app or a new must-have piece of consumer hardware. Or even a better way to surf the internet.

Amazing breakthroughs are in the pipeline. That bodes well for America’s technology race with China. More importantly, it bodes well for a promising future.

I’ve greatly enjoyed sharing my analysis of technology for the past five years. We’re ending Kiplinger Alerts, but we’ll continue to write about these issues in our weekly Kiplinger Letter, which you’ll start receiving by e-mail at no charge in lieu of Alerts, each Friday afternoon. (If you’re already a Letter subscriber, you’ll receive a complimentary extension of your subscription.)

Thanks for reading and please feel free to e-mail me about any tech-related topics in the future.

Final Thoughts on a Wild Ride for Oil

It seems that, in the oil market, low prices really do cure low prices. A few weeks ago, when the price of benchmark West Texas Intermediate had climbed from $10 to nearly $20 per barrel, I tentatively predicted that “we may have seen the worst for oil.” Flash forward to today, and WTI is trading at about $34, nearly triple its low point earlier this spring (setting aside the bizarre day when one monthly WTI contract actually closed below $0).

The global coronavirus pandemic hasn’t run its course, and the economic damage it has sparked still has further to go. But there are some basic factors lining up in oil’s favor. U.S. consumption, which cratered in March and April when state governments issued unprecedented stay-at-home orders, has staged a partial recovery. Daily demand, which typically comes in around 21 million barrels, fell to less than 15 million barrels, but has since clawed back to about 16.5 million. As more states relax their public health orders and consumers venture out on the roads, we can expect demand to grind higher (unless a new wave of infections forces the economy to shut down again). Meanwhile, production around the world is dropping. In the U.S., daily output has fallen from a record of 13 million barrels before the crisis to about 11.5 million now. The number of rigs drilling new wells is at a record low. OPEC members, Russia and other producers are taking the difficult steps necessary to curb exports while they wait for demand to come back.

There has been plenty of pain for the industry, even as prices have shot higher. Energy stocks have substantially underperformed the broad market this year. Many companies have had to cut or end their dividends, a further blow to shareholders. The shale industry faces a wave of debt repayments in the coming years after borrowing heavily to drill thousands of wells in places like Texas’s Permian Basin. Oil at $34 per barrel isn’t going to solve any of those problems. (Was it really just 2014 when WTI traded for about $100?)

So where do we go from here? I’ll stick my neck out one more time and guess that despite plenty of short-term ups and downs, oil prices will keep climbing this year, again, barring the dreaded “second wave” of coronavirus infections. Much of the industry is unprofitable at today’s prices. The economy won’t be weak forever. Workers will start heading back to their jobs. Travelers will (eventually) get on airplanes again.

So consumers should expect gasoline prices to keep creeping higher. After bottoming out in late April, the nationwide average price is up about 15 cents. Some states are seeing far steeper rises. (In Wisconsin, the state average fell to about $1.20 per gallon in late April. Today, it’s up to $1.86.) Most folks hitting the road for Memorial Day can expect wallet-friendly fill-ups, but later this summer may be a different story.

The longer run is harder to predict. As we bring Kiplinger Alerts to an end this week, I’ll leave you with a few thoughts about the future of the oil industry.

First, how much has the pandemic changed the way people work and live? I doubt we’re on the cusp of a future where everyone works from home; indeed, most jobs can’t be done remotely. But it seems likely that a sizable number of people who were forced to stay home this spring are going to decide they like working from home, at least part-time. Telecommuting was already on the rise, and this societal work-from-home experiment is demonstrating that millions more people can do it. Employers probably won’t object to the potential rent savings that come with a smaller office. So, I expect a lasting hit to demand from folks who end up working remotely a day or two per week.

Second, how quickly does the electric future arrive? Electric vehicles are still a niche segment, but they’re a growing niche. As I wrote recently, we’re about to see a bevy of electric pickup trucks and SUVs hit the market, partly driven by government mandates and partly driven by falling battery prices, which make EVs more cost-competitive. I believe there’s still a lot of life left in the internal combustion engine, but I also believe EVs will be fairly commonplace before long. How many consumers ultimately decide they prefer plugging in their car overnight instead of stopping at a gas station will go a long way to determining whether global oil demand can continue its decades-long rise. This is a question that must keep oil company executives awake at night.

Third, will the oil industry still be able to raise the capital it needs to keep production up? Fracking is an expensive process, and many investors have gotten burned financing it over the past decade. Especially after seeing oil prices plummet to multidecade lows this spring, are Wall Street banks or private equity outfits going to keep lending to oil producers, or buying their shares? Are the small retail investors? For years, they bought shares in big oil companies largely in order to collect the juicy dividends paid out by those firms. But with dividends under pressure, and many companies cutting them to save cash, will oil stocks hold the same appeal? Then again, perhaps the industry can find new ways to slash its production costs and return its balance sheets to good health.

Whatever happens, it’s safe to say that the 2020s will be a pivotal decade for an industry that shaped the 20th Century but is under major pressure in the 21st Century. I’ve certainly enjoyed tackling some of these topics over the past five years, along with the many thought-provoking questions and comments I’ve gotten from readers during that time. Though we’re closing the book on Kiplinger Alerts, I hope you’ll keep in touch and drop me an e-mail about all things energy-related. And we’ll continue to write about these issues in our weekly Kiplinger Letter, which you’ll start receiving by e-mail at no charge in lieu of Alerts, each Friday afternoon. (If you’re already a Letter subscriber, you’ll receive a complimentary extension of your subscription.)

Thanks for reading. It’s been a pleasure.

Green Shoots for the Oil Market

Energy companies are reeling from the historic oil price rout. The Wall Street Journal reports that Exxon Mobil just notched its first quarterly loss in three decades. Venerable Anglo-Dutch producer Royal Dutch Shell just cut its dividend for the first time since 1945. Other dividends paid by the industry are being slashed or frozen, too.

The financial pain isn’t surprising, given that benchmark U.S. crude oil fell from more than $60 per barrel in January to $10 recently (and, very briefly, in a strange quirk of futures markets, below $0). Worldwide energy demand is way down as the coronavirus pandemic curtails travel and trade. Consumers sheltering at home aren’t buying much gas for their cars, and shipping companies don’t need much diesel when there’s scant demand for most of the products they normally transport.

Barring a miracle cure, the economic damage is likely to continue. But if you look closely, you can see signs that the worst of the hit to the oil market may be over.

Gasoline consumption in the U.S., the world’s largest oil market, remains anemic. But data from the Department of Energy show that gas sales have ticked slightly higher for two consecutive weeks now after bottoming out in mid-April. Retail gas prices, which had been dropping steadily every day for weeks on end, actually rose by a penny from yesterday to today, according to AAA. At $1.78 per gallon for regular unleaded, the national average price is still quite cheap. But we may be near the bottom for both fuel demand and prices.

Crude oil prices have responded accordingly. After trading at $10 last week, West Texas Intermediate has rallied to nearly $20. There’s no guarantee prices won’t sink yet again, especially if energy producers run out of storage for their surplus production while demand is so weak. But here, too, there are glimmers of hope for the industry. OPEC’s production cuts are scheduled to take effect starting today. Energy firms in the U.S. continue to shut down drilling rigs, which means there will be fewer new wells coming online in the next several weeks. Other companies are capping existing wells, figuring it’s better to keep the oil in the ground than to sell it at a loss.

Expect extreme volatility in oil prices to continue, given the unprecedented damage to the global economy that the coronavirus is causing. But if commerce and travel can slowly start to emerge from spring hibernation, and if producers keep closing the oil taps, we may have seen the worst for oil.