If there is one thing that seems clear about the Covid-19 crisis, it is that it has been won by Big Tech. From Amazon to Netflix to Facebook and Google, we have relied more and more on the giants of the internet. And they will emerge from the crisis more powerful than ever. But is this really true?
As the economy went into lockdown, the more of your portfolio you had invested in technology shares, the better. Apple, Microsoft and Amazon all quickly recovered from the initial stockmarket slump and went back up above the $1trn market value level and their peers were not far behind. Amazon is up by 33% since the start of the year and has been hitting fresh all-time highs, while Apple is up 13%. It’s been an impressive performance.
The small fry race ahead
Yet small tech is doing even better. DocuSign (Nasdaq: DOCU) is up 100% this year (lots of us want to sign documents remotely right now). The cloud company Zscaler (Nasdaq: ZS) is up 130%. Twilio (NYSE: TWLO), a communications platform, is up by 100%. Among the online retailers, it is not Amazon that is the real star. The online pet-food company Chewy (NYSE: CHWY) is up by 70% since the start of the year. The internet retailer Wayfair (NYSE: W) has seen its shares double since the start of 2020.
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Those are American companies, but it is a similar story in this country, even though our quoted technology sector is far smaller. The web-based fashion retailer Boohoo (Aim: BOO) is up strongly this year. So is Ocado (LSE: OCDO). And some of the best start-ups are still managing to raise fresh cash, helped along by the chancellor’s new start-up fund.
There should not be any real surprise that the small fry are racing ahead. In most industries, for most of the time, small companies do better than giant ones. They are more flexible. Change is always hard and the bigger you are the harder it gets. Bureaucracies become entrenched, staff become set in their ways and the bigger a company gets the more true that becomes.
Small companies can change in an instant as the market develops. They can seize opportunities as they develop. If everyone is suddenly working from home, they can come up with the tools to support that overnight. If products have to be changed for a world in which everyone is socially distancing, then it can happen far more quickly at a small business than at a big one.
And it is easier for them to “shift the dial”. It is hard for Amazon or Apple to come up with a new product that will have a significant impact on the bottom line. A firm with sales of only a few hundred thousand, by contrast, finds it much easier. It can double or triple in size in a year. In a fast-moving crisis, when old markets are crumbling overnight and new ones appear out of nowhere, that is more true than ever.
The survivors from a brutal contest
Big Tech is not in fact nearly as strong as it sometimes appears. It has size on its side. And it has plenty of money to throw around. But the internet remains the most brutally competitive and open marketplace ever created. An entrepreneur with a better idea can muscle his or her way into the market very quickly. During lockdown, as we rely more than ever on the web, lots of small companies are seizing the moment and taking a slice of the market.
There are two important lessons here. The first is that it is a mistake to just invest in the same old familiar names. The real gains are not being made by Amazon and Apple and the rest, but by much smaller companies. The returns from those businesses will be far more spectacular than they will be from the big companies.
The second is that the established giants may have some serious challengers a few years down the road. Amazon, Netflix and Facebook may look impregnable, but lots of small, smart and aggressive rivals have established themselves in the last few months. Over time, a few of them are going to grow into serious competitors. The real winners from this extraordinary crisis will be small technology companies. A few of them are already starting to emerge.
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