COVID-19 is beating up the global markets. The gravitational pull behind the coronavirus is not a new phenomenon as some international indexes have plunged by 30% over the past month. The graph below crystallises the damaging effects of COVID-19 on the Tech industry. In turn, the coronavirus is forcing the digital economy to restructure itself.
Today we are discussing how the digital economy is restructuring and whether there are any investment opportunities?
The Restructuring of the Digital Economy
What is the digital economy? Essentially, the digital economy is where the markets are based on businesses that operate via the internet. The emergence of the following areas showcases how the coronavirus is forcing the digital economy to reform.
1) Bit rates & Video Quality
Bit rates refer to the number of bits (the smallest unit of storage in computing) that are transmitted along a digital network. The bit rate determines the quality of your video. Consequently, as the bit rate rate increases so to does the quality of your video.
The governments strict isolation measures are triggering a titanic surge in the number of people using video sharing and streaming services. In turn, streaming service companies such as Netflix are lowering their bit rates to reduce the stress on global networks. If the coronavirus continues to force us to bunker down, then we should expect low bit rates to be the norm.
2) The Shift to Online Learning & Conferencing
Global lockdowns are causing businesses to use online channels in an attempt to create a virtual office environment. The astronomical growth in Slack Technologies (NYSE: WORK) and Zoom Video Communications (NASDAQ: ZM) demonstrates how businesses are gravitating towards online conferencing during these turbulent times.
3) Digital Banking
Most of us are familiar with online banking, but know that we can always go down to our local branch if we have a problem. However, the coronavirus is causing our local branches to shut up shop as the banking industry goes digital.
For example, Nedbank, a retail bank in South Africa, is accelerating the roll-out of its digital strategy by improving the user interface of its online app. In the long-term, Nedbank is expecting to have 75% of its sales come through digital channels, and for 70% of clients to be digitally active. If the coronavirus continues to wreak havoc on the global economy, then we could be saying goodbye to local branches and hello to digital banking.
Is the restructuring providing any viable investment opportunities?
Amidst the reformation of the digital economy many tech stocks are prone to receive unprecedented traction.
Akamai Technologies is an American company that specialises in content delivery networks, cybersecurity, and cloud computing services. Akamai is responsible for delivering about 40% of all global internet traffic.
Why has Akamai caught my attention?
In the last month, Akamai’s share price jumped by 3.15% to US $93.12 (at the time of writing). Mainly because investors are expecting Akamai to experience a surge in their earnings as they deliver more content for streaming services such as Stan. Akamai’s P/E ratio of 337.2 supports this positive forecast. Especially when the industry average is 37.93.
Moreover, between December 2019-2020, Akami reported a 9% increase in revenue, an 11% increase in Net profit, and a 2.4% increase in ROE. Thus, Akamai’s impressive track record further explains why investors are rallying behind the tech stock.
Is Akamai worth the investment?
Despite the stellar story so far, we must discuss the negatives. Because YIG believes that all investors should have a balanced perspective before making any trade.
Between 2018 to 2019, Akamai’s D/E ratio deteriorated from 0.38 to 0.71. However, this could be management taking advantage of a low-interest environment to expand. Also, Akamai doesn’t hand out any dividends. Meaning the only way you can profit off Akamai is through a capital gain.
I am holding off purchasing Akamai shares for two reasons. Firstly, upon analysis, Akamai’s share price is overvalued and will likely experience a correction in the imminent future.
Secondly, I’m waiting for Akamai’s March financial’s to gain a better insight into the future performance of the business. With a tsunami of people using streaming services, such as Stan, Akamai’s revenue may increase.
However, the cancellation of major sporting events, such as Wimbledon, may hinder Akamai’s March financials and any earnings guidance for the rest of 2020.
If you would like to learn more coronavirus investment strategies, click here:
- Inverse Exchange Traded Funds (ETFs)
- Investing in high-growth, undervalued micro-caps
- Investing in gold
- Snapping up quality blue-chip stocks at a discount
- Riding the waves of trending stocks throughout the virus (eg. Hand sanitiser, toilet paper stocks or Covid-19 vaccine companies).
Here is our free, uncomplicated, and extensive ASX portfolio
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The information above should not be taken as financial advice. Youth Investment Group has no liability for personal financial interests or investment decisions. You should make your own investment decisions based upon your own research and what you believe is best for you.
Written by Sergeo Domtchenko, Associate of YIG Australia.