As hard as it would have been to believe back in the olden days (like in February) my wife and I are now in the 7th week of “Sheltering in Place” and it has just been extended another 4 weeks. The questions constantly being discussed among my colleagues, friends and family are:
- How long will this last?
- What will life be like at the beginning of the end of this initiative?
- When will things go back to normal?
- Who will the Warriors draft with their high pick this year (OK not everyone brings this one up)?
I’m not going to try to answer any of these as I’m sure you are all bombarded with potential answers and there are many who know more than I do regarding a pandemic. In this post I’ll try to grapple with 3 different questions, each of which deserves a section below.
Question 1: How will the long-term ramifications of Covid-19 impact success for companies and what can they do to enhance their opportunity?
This is a long-winded question and will get a long-winded answer. To begin, I believe this will only accelerate several trends that are already in place: online commerce gaining share, the use of video conferencing and the virtual workplace, as well as increased emphasis of companies being economically efficient. The pandemic has forced most people to be much more cautious at venturing out to accomplish such everyday tasks as shopping, eating in restaurants and going to the movies. Instead, they are learning that almost everything can be bought online (including food from some top restaurants), conferencing with Zoom provides a great experience at a low cost, and business efficiency will be correlated with survival.
My wife and I have long been online shoppers but as we shelter at home, we have increased the volume of purchases quite significantly. Department stores that were previously experiencing loss of share to online merchants but were resistant to devoting sufficient effort to their own online stores are in deep trouble. It appears likely that a number of well-known and not so well-known retailers will file for bankruptcy within the next few months. The combination of people becoming more comfortable with buying just about everything online and a major reduction in the number of physical outlets will open up more share for online players and for the online stores of multi-channel merchants.
During the current environment my board meetings (as well as everyone else’s) are being held as Zoom conference calls. For many companies, having such a meeting eliminates travel and hotel expenses for employees, board members and advisors. Replacing this with a Zoom conference call can mean lowering the cost to hundreds of dollars, from tens to hundreds of thousands of dollars, per meeting. While I am a big fan of the value of face to face, many companies will be re-evaluating whether having more of their meetings through video conferencing makes sense in an era when the technology has emerged as very viable and extremely cost effective. I’m not suggesting that all board meeting will be executed as video conference calls as face-face remains important, but perhaps companies will decide to do half of their meetings as a Zoom call. An interesting example is the NFL draft, where it was conducted through use of Zoom instead of renting a large stadium and paying for travel expenses. Reviews have suggested that it was actually a better event than the prior year. I suspect the cost savings between all parties involved ran into the millions of dollars.
For many companies the pandemic has weakened revenue, putting pressure on survival. The government “bailout” PPP program helps, but by itself can prove insufficient to prop up companies with weak business models unless they have a very large cash reserve. The investment community was already shifting to focus more on efficient business models prior to Covid-19 but its disruption has helped to highlight the importance of building a profitable business.
Question 2: What should Companies do in the current environment?
What Azure has been suggesting for its portfolio companies is the following series of steps:
- If you are eligible, apply for government assistance through the PPP, SBA emergency loan or other programs.
- Create multiple models for your business under different scenarios (different dates that people will be back to normal, whether consumer spending will be reduced even after being back, whether customers will delay payments, etc.)
- If one or more of credible scenarios indicate that you will run out of cash, then cut costs as quickly as possible. For employees making over $100,000 per year (including founders) cutting them back to some amount that is still at $100,000 or more will have no impact on the forgiveness offered on the PPP loan.
- Make every attempt to extend any bank lines coming due as banks have been asked to cooperate with their customers.
- If you can afford it, be as kind as possible to your customers by extending terms, etc. Not all, but many, will remember your help and repay you with increased loyalty.
- While advertising seems an easy area to cut costs, make sure you evaluate the payback period for customer acquisition marketing as costs may be lower and online conversion may be higher (we have seen that with a number of our companies). In fact, if the payback is reasonably quick it may pay to play offense by being aggressive!
- If you have a strong cash position it may be a time to consider acquisitions as many companies will be struggling.
- If you have a product that customers are opting to purchase in this environment, think about trying to convert as many as possible to a subscription so that you can extend the relationship beyond the current situation. This can be done by offering attractive discounts for signing up for one or more years rather than month to month. For example, Zoom offers 2 months free if you opt for an annual plan versus a monthly plan. My wife and I decided the cost savings made it worth signing up for a full year.
Question 3: Who are the current and longer-term winners and losers as a result of Covid-19?
The biggest winners appear to be those that can leverage working at home, educating at home, buying at home, supplying infrastructure for increased online usage, and supplying products for increased cleanliness of surfaces and one’s self. In the public markets, I fortunately have 3 of my annual Blog recommendations included in these categories:
- Zoom is the most obvious example of a beneficiary of people working and educating at home. It has reported that daily usage is up an astounding 30X between December and April. Its stock performance is just as astounding, up well over 100% year to date from the time of my pick in early January. The question for the company is whether they can harness this to make us permanently change how we communicate. For my wife and I, the number of Zoom calls we are on is now running between 5 and 10 per week. When I add my business calls the number is quite a bit higher. As they say: “How ya gonna keep ’em down on the farm after they’ve seen Paree?” That is, we are permanent customers as are many of our friends and colleagues.
- DocuSign is another of my blog picks that should benefit in both the near term and longer term from the impact of the virus and sheltering at home. Its stock reflects higher expectation as it has increased in value by 41% year-to-date. If more meetings are going to be virtual then more documents will require esignatures and DocuSign is the runaway leader in the category
- There are many other pure play beneficiaries of a future where more people entertain themselves, work and educate at home. This includes Netflix (stock up over 25%) who has seen a large spike in usage, Slack (stock up 30% since January 27), and online educational plays (our former company Education.com has seen a large spike in traffic and revenue as has our existing portfolio company Showbie)
- Amazon is the poster child for purchasing online. It has announced hiring of 175,000 employees for increased warehouse and logistics operations which Wall Street interpreted as a massive increase in demand driving the stock to new highs (its currently up over 25% YTD). It should also benefit from increased purchases of eBooks and increased online usage of its Web Services (I haven’t seen much chatter about AWS benefit but it should be very large and is highly profitable). Azure portfolio company, Open Road is seeing a significant increase in its sales of eBooks since sheltering-at-home began.
- Infrastructure Companies whose revenue varies with web usage should also benefit as volumes are increasing massively: Zoom announced that daily usage is up 3,000%; many others I’ve heard have ranged from 50% to 700% or more. Schools are converting to online classes with student usage increasing to 4-7 hours per day. Gaming companies are also beneficiaries and users. I believe that total web traffic is up at least 50% and perhaps a lot more versus where it would have been.
- Clorox is one of the major beneficiaries of our new emphasis on cleanliness through disinfecting our environment and washing our hands many times a day, as recommended by the new folk hero Dr. Fauci. While its stock is up 20% year-to-date, the question is whether the increased demand for disinfectants is a permanent change. I’m guessing that increased usage is permanent… but not to the extent we are seeing today.
Losers span several industries and the question for many of the companies in these industries is how permanent the loss of demand will be. Let’s look at them sector by sector.
- Department Stores are currently shut down in most of the United States. Companies already struggling are now experiencing substantial losses every week. Those that have a pharmacy or grocery area (like Walmart) can stay open, but the real key to reducing the losses is the effectiveness of their online offering. In most cases this is pretty weak, both in percentage of the retailer’s sales and the level of profitability given inefficient distribution and high levels of returns. I expect multiple brand name players to file for bankruptcy before the year is over.
- The Travel Industry is being hit very hard by the shelter-in-place requirements. Airlines are flying planes that are nearly empty but trying to maintain their cash by not cancelling flights until close to the date of departure so that passengers cancelling will get credits rather than rebates. One hotel I spoke to when cancelling my reservation told me that occupancy was down 90%. Many have already closed their properties. While I expect business to improve greatly for both of these arenas when we are back to normal, they are both accumulating massive losses which might pressure viability. Further, when we are back to normal (whatever that becomes) I suspect that airline traffic will be down through at least mid-2021 as fears are elevated and will take some time to subside. Cruise lines may be in worse shape as the publicity around the various ships that had large portions of passengers and crew get Covid-19 has definitely caused many to reconsider vacationing this way. I expect this sector to be impacted at least through the end of 2021. Also, cruises have had to refund most fares as opposed to providing a credit for future travel.
- Arena Entertainment providers and entertainers have been hurt badly by the closure of their venues during this time period. This includes movie theaters as well as complexes like the Chase Center and other arenas. The question becomes when will they be able to be open for full occupancy? And when they are will people stay away for some time. I expect many of them to be at full occupancy by early 2021 as younger people (who make up the majority who attend concerts) will drive renewal of demand for concerts.
Short-term Losers that can Return to Success
- Advertising Platforms (TV, Web, etc) have seen demand drop as the travel industry, live events and brick and mortar retailers have little reason to maintain prior spending. Additionally, those companies looking to cut cost view advertising (especially brand building advertising) as a prime candidate for cuts. However, I believe that demand will return to normal as stores reopen and travel is permitted. As of now this appears to be sometime in Q3. While many companies in sectors that take longer to return to normal will still have reduced budgets, online players will likely increase spend, as will those seeing this as an opportunity to gain share.
- The Sports Industry consists of teams, leagues, arenas, ticket sellers (like Stubhub), equipment providers and betting. All of these are experiencing close to zero revenue (with the exception of some equipment being sold for home use). Leagues (and teams) with large TV contracts are likely to reinitiate games without live audiences by July as participants can be restricted to those having tested for no virus immediately before a game. Even without an audience the TV money will make this profitable to do. Once these are back in play, betting will resume. Equipment providers can still sell T-shirts and other paraphernalia online, but once games resume their sales will increase. By as early as the fall, but no later than early 2021, I expect that many states will allow live audiences for games and that arenas will be back to normal capacity for them. This would allow ticket sellers and sports betting to be at normal capacity. Equipment suppliers also depend on school purchases as well as little league, etc. So, while revenue will begin growing in the fall it may not be back to normal before early 2021. A noted exception will be providers of at home equipment, like Peloton, which will lose business from gyms in the short run but should see a large increase in at-home purchases.
- Non-Internet Service Providers (other than delivery services) have a particularly hard time as physical services cannot be provided online. Things like the Geek Squad, physician checkups and procedures, elective surgeries, automotive services, personal care like haircuts and manicures, massages, and more have been suspended. But as long as the entities survive this period, I believe there will be no permanent impairment of their businesses.
Coming back to where this post began, I’m still wondering who the Warriors will draft! But more importantly, I hope all of you and your families are safe and healthy. We will get through this!
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