The pandemic has triggered enormous disruption, accelerating existing investment themes and facilitating new ones.

The coronavirus and resulting shutdowns altered the lives of billions of people and broad swaths of the economy. Limitations on mobility and personal contact moved digital tools to the forefront, as people communicated, worked, shopped and played through their computers and other devices more than ever before. As noted by Microsoft CEO Satya Nadella, the world saw “over two years of digital transformation in two months.” With reopening, there will be some drift toward historical norms, but in many ways, there is no turning back: New habits are in place and the momentum is accelerating.

What are the implications for companies and investors? We explore some key trends below.

Acceleration in E-Commerce and Behavioral Change

For several years, acceptance of digital commerce has grown at the expense of traditional “brick-and-mortar” retailers, which saw more than 9,000 U.S. store closings last year.1 During social isolation, a much broader cohort of consumers looked to websites and digital apps to make purchases. Their reach extended beyond electronics, books and small household items to products and services where there had been more reluctance to make online purchases, including health care items, furniture and groceries. Glitches have occurred along the way; some services were unreliable and many products unavailable, while securing delivery slots was sometimes a strategic initiative. However, many online-oriented companies benefitted. For example, DoorDash and other food delivery apps saw a spike in demand, while retail giants including Amazon and Walmart expanded hiring to keep up with a surge in digital orders.

In Shutdown, U.S. Online Sales Surged

Daily Digital Volume: April vs. March

COVID-19 Shutdown

Source: Adobe Analytics, April 1 – 23 compared with March 1 – 11, 2020. Based on daily online sales data from visits to retail sites and product SKUs from retailers, across 18 product categories, including apparel, electronics, home, grocery, appliance, personal care, office supplies, books, jewelry, furniture and toys.

With gradual reopening, we will likely see a slowing of this expansion. However, concern about infection will probably linger for many months, contributing to an aversion to in-person contact and preference for remote purchases where feasible and satisfying. This may be particularly true for older people who are vulnerable to the virus and have grown more comfortable with digital transactions. Moving forward, we expect increased online business for staples (with gains in repeated, scheduled purchases), health care products, including prescriptions, and even for more nascent digital areas such as car sales and luxury goods.

The extended timeout has only made things worse for many traditional sellers. Already, more than 15 major retailers have declared bankruptcy in 2020, while store closures have reached over 4,000 and could total as many as 25,000 by year-end.2 However, we do not believe this spells the end of “brick-and-mortar” retail, but instead reinforces the importance of achieving true “omni-channel distribution,” with sales at conveniently located physical stores and online, backed by robust logistics to meet demand for fast delivery.

Mass Introduction to Remote Interaction—Digital Strategy Not Optional

During social distancing, a huge segment of the global population received a crash course in remote communications as meeting applications were employed to host business meetings, school classes and religious, community and family gatherings. Cisco Systems’s video-conferencing app Webex drew a record 324 million attendees in March, with usage more than doubling in the Americas. Rival Zoom's daily users jumped to more than 200 million from a previous maximum of 10 million.3 Businesses and other organizations realized they had to have a digital strategy, creating significant opportunities for companies that could help them in that effort.

Although not practical for many service and blue-collar jobs, companies generally found the process of conducting work from home surprisingly effective. In the future, managers may be more comfortable allowing remote work arrangements, while noting the potential financial benefit of reduced real estate and improved disaster preparedness from a geographically diverse workforce. Remote education has received a more mixed reception, as it became clear that keeping students engaged at a distance could be challenging, and potentially worsen inequality where some students lack sufficient internet access. Still, on a large scale, the population became more familiar and comfortable with remote video and communication tools, likely making them a more established and permanent part of the social and economic landscape.

Changing Entertainment and Consumer Habits

Will entertainment ever be the same again? For months, consumers experimented with and expanded their use of digital offerings across devices. Streaming services saw robust growth in usage; Netflix, for example, added 15.8 million subscribers in the first quarter of 2020, more than twice than expected, for a 22% gain year-over-year. With movie theaters shuttered, some widely anticipated releases were sent straight to video. Among them, “Trolls World Tour” was a standout, generating about $100 million in fees and estimated revenues on par with the first “Trolls” movie. Gaming also saw massive growth, for example with the Twitch streaming platform logging 1.5 billion user hours in April, or twice the projected figure. These extremes aren’t expected to last once reopening takes hold, but some permanent effects seem likely. For example, in movies, it may be easier to execute “straight to video/streaming” releases without an initial stop at theaters. Moreover, the appeal of gaming may now be more apparent to previous holdouts, especially as virtual and augmented reality features become more common.

Consumer habits could change in other ways. Travelers’ shift from traditional “experiential” tourism to more curated vacations at theme parks and other venues may accelerate given new concerns about safety. More broadly, products that deliver accessibility, affordable luxury and wellness may command greater wallet -share, as consumers look to services that improve and protect their lives. In-home physical fitness, health products and dietary improvements may see growth, along with disaster preparation and home improvement tied to more pervasive “nesting” behavior.

Growth in Cashless Transactions

Given the drastic, short-term shift toward e-commerce and digital services, it should be no surprise that digital payment also accelerated. In April, for example, PayPal saw an increase of 7.4 million new active accounts and a 22% rise in payment volume, while Visa experienced strong growth in its non-card digital transactions. Although many larger companies were already well represented electronically, smaller businesses needed to move quickly to ensure they could maintain a lifeline through digital sales, seeking to shore up these capabilities via third-party vendors. To illustrate, Wix, which helps businesses create their websites, saw a 63% increase in registered users in April (year-over-year) compared to 16% in the first quarter. In our view, companies that support or facilitate digital transactions could enjoy tailwinds in the years ahead.

PayPal Accounts, Volume Saw Gains in Lockdown

PayPal Accounts

Source: PayPal.

Visa’s U.S. Non-Card Payments Accelerated

VISA

Source: Visa.

Moving forward, in-person sales will likely rebound, even as the public grapples with safety concerns. One beneficiary may be contactless cards. A survey4 released in early March showed that a growing number of U.S. consumers consider contactless payment to be a basic need. Such cards offer tap-and-go payment without physical contact between the user’s phone or payment card and the sales terminal. According to Visa, 190 million contactless cards have been issued in the U.S., while nine out of 10 grocers and 80 of the country’s top 100 merchants now accept them.

More broadly, the perception that cash is dirty—and now potentially dangerous—may tip the scales toward digital transactions, even at lower denominations where cash use has been stubbornly persistent. (As of 2018, 55% of payments below $10 were paid in cash.5 ) One powerful argument against eliminating cash transactions has been the lack of access to electronic payment for the underprivileged. However, with concern about contagion, it could be that activists’ focus will shift from preserving cash options to making cashless methods more inclusive. Still, we believe that cash will remain part of the transaction mix, although increasingly relegated to a smaller percentage of transactions overall.

Spread of Digital Automation

Advances in artificial intelligence, robotics and data science, combined with growing wireless connectivity and the growth of connected devices (the “internet of things”) have contributed to a wave of automation across industries—something that we believe is only going to accelerate in the wake of COVID-19.

A key challenge for many businesses during the pandemic has been how to maintain operations while observing social distancing. For service-driven firms this is often easier given the ability to facilitate remote work arrangements via Zoom and other software applications. However, the task is more difficult where employees must work in close proximity, for example, in meatpacking plants, assembly lines or logistics centers. Automation and remote monitoring have become tools to maintain productivity while limiting physical contact among personnel. Safety has also helped drive new interest from retailers in expanding automated servicing and checkout.

Elsewhere, fears about contagion in public transportation have helped renew interest in individually operated cars, which are increasingly equipped with automated safety features. While overall sales have dipped amid the lockdowns, customer willingness to pay for safety and electrification has been steady. More specific to the pandemic, self-driving vehicles have seen high-profile use, for example in transporting medical equipment and blood samples at institutions like Mayo Clinic, while ride-sharing companies have been moving more aggressively into automated delivery to help address booming demand for digitally purchased goods.

Transition to Automated Driving Capability

Transition to ADS

Source: Neuberger Berman. For illustrative purposes only.

Increased Focus on Reliable Connectivity

The pandemic has demonstrated that, for businesses, secure access to applications from multiple locations, supplied by the Cloud, will be essential to survive and grow. In our view, the next generation of communications infrastructure (so-called 5G) will be foundational for the delivery of goods and services given the need for higher speed, lower latency (response time) and increased reliability. As noted, wireless technology is increasingly important to heighten efficiency and safety for companies and individuals. The expanded use of big data (highlighted in tracking COVID-19), acceptance of remote telemedicine, and trends like artificial intelligence and autonomous driving, along with the e-commerce and consumer/business developments noted above, have added urgency to the task of expanding digital capacity on a global basis. As part of this process, attention to security will likely be essential to protect individual data and insulate organizations from bad actors.

In theory, these growing applications suggest that more money and effort will flow toward network upgrades, and accelerate the potentially decade-long shift to 5G. However, while some companies have found that reduced crowds and traffic have made their work easier, in some cases local government closures have actually slowed approvals needed for the buildout. While that is unlikely to last, a greater concern is tensions between the U.S. and China as they jockey over the origins of the pandemic and geopolitical/technology issues, including protection of intellectual property, which could be crucial to develop and sustain competitive advantages. Ultimately, we don’t believe this ongoing conflict will get in the way of 5G development, but it could potentially lead to a bifurcation of networks, supply chains and technology on a global basis.

5G Buildout Moves Forward

Global Mobile Data Traffic (Exabytes/Month)

5G Buildout

Source: Neuberger Berman, Ericsson, Qualcomm.

Telemedicine Surges

  • Growth of “telehealth” visits and messaging was stagnating until the pandemic
  • Share of U.S. consumers using telemedicine rose from 11% in 2019 to 46% in April 2020.
  • Providers have reported 50 to 175 times the number of digital visits versus pre-pandemic.
  • 57% of providers view telehealth more favorably now than they did before Covid-19.

Source: McKinsey & Company, May 2020.

Conclusion: Seismic Shifts, Major Opportunities

We have touched on a few important areas of change, but there could be others. Residual caution about closely packed cities may slow the U.S. trend toward urbanization and foster demand for products catering to a more decentralized populace, while more remote working arrangements may lessen the need for corporate office space. Even as physical retail retrenches, e-commerce could support demand for warehouses and logistics operations. Trade wars were already causing a rethink of operations, and with heightened focus on emergency preparedness we could see companies create redundant supply chains, hold more inventory and maintain greater domestic operations. In health care, telemedicine is no longer a fringe idea, while new focus on research could accelerate innovation. In addition, we are likely to see an increased focus on moving supply chains to domestic locations.

The potential for disruption—already heightened due to a confluence of technology and business trends—has jumped to a new level across the global economy. For some time, we’ve argued that select investment themes—fintech, next-generation mobility and 5G connectivity, among others—offered unusual potential. However, the story does not end there. We believe that, over time, the range of thematic opportunities will expand as society and business evolve. For investors, seeking to identify and capitalize on those new trends will likely be a key challenge and opportunity in the years ahead.

Next-Generation Digital Opportunities

Connectivity (5G)
Wireless infrastructure is poised to enable a new wave of applications across entertainment, transportation and industry. New 5G connectivity has the ability to improve speed, capacity and reliability across networks. Providers of infrastructure, devices, applications and services could benefit.

Fintech
Digitization of financial services is transforming payment, lending, wealth management and more, offering convenience, speed and lower costs. Payments and ecommerce, data and analytics, physical infrastructure and early adopters are likely areas of opportunity.

Mobility/Automation
The shift toward self-driving, electrification and connectivity could make transportation cleaner, safer and more efficient, fostering new business models and increasing sustainability. We favor suppliers, enablers and other companies well positioned for the automation trend.

Health Care
The post-COVID world is likely to see increased spending on digital modernization across the health care system and supply chains. We see growing opportunities in digital enablement of medical equipment, facilities and R&D, among other areas.

Equity research analysts Michael Barr, Daniel E. Flax, Charles Murphy, CFA, and Scott Woodcock, CFA, contributed to this article.