Morgan Stanley investment bankers share key takeaways from the firm’s virtual European Technology, Media and Telecom (TMT) Conference, focusing on the impact of COVID-19 and structural trends driving growth.
The initial impact of COVID-19 on economies and markets was broad and largely indiscriminate. Markets dived. Economies tanked. Few sectors were spared. But then, the pandemic began to differentiate clear winners—including tech platforms that facilitated remote work and study or those that kept people entertained, fed and healthy during lockdown—from industries with uncertain paths to recovery.
“Digitalization, cloud adoption, big data and analytics, artificial intelligence and the Internet of Things have all accelerated this year because of the pandemic and will drive growth in the future,” says Athena Theodorou, an Executive Director in Investment Banking who specializes in software and healthcare technology.
At Morgan Stanley’s recent European Technology, Media and Telecom (TMT) Conference, a virtual gathering of more than 180 companies and over 1,300 investors, Theodorou and others in attendance noted that growth could come in many forms. Companies emerging from the pandemic with greater momentum, strong valuations or high capital may look to expand, whether through mergers and acquisitions or by going public. And that could mean 2021 will be an opportune year for deal-making and funding strategies that could power longer-term growth.
Industries Accelerated by COVID-19
Like remote work, virtual learning captured the spotlight during the pandemic, as college campuses emptied in the spring and most local schools went entirely online. Indeed, COVID made the digitalization of education a mandatory crash course, not only for educators, but also for hundreds of millions, if not billions, of families around the world.
The learning curve has been steep this year, but the sector is still at the beginning stages of a digitalization transformation. “Education tech is very early stage—only 3% is digital,1 compared with, for example, retail, where digital is already 16% of the overall sector,"2 says Andrey Tsitsinskiy, an Executive Director specializing in education-sector investment banking. “Investors are trying to figure out how to play the growth in this market.”
They are also debating which “ed-tech” model is better positioned to capture growth. Will it be the “direct to students” model or the business-to-business version that partners with schools or corporations to develop and deliver content? Investors will also monitor how much of the sector’s growth will stem from proprietary content, schools, colleges or corporate learning and watch for potential IPO candidates, says Tsitsinskiy, as companies flush with venture-capital and early-stage funding consider their next steps.
Video-gaming is another big beneficiary of the pandemic stay-home market. “Global video game industry growth has been significant and is on track to be a $200 billion-plus market by 2023,” compared to its $159 billion in revenue in 2020,3 says Daniel Vyravipillai, an Executive Director in investment banking who covers the industry. Mobile video games, in particular, are expected to play a big part in this growth, with an estimated 2.5 billion active mobile gaming players worldwide today.4 Meanwhile, the growing migration of video-gaming into the cloud and streaming platforms could one day render consoles and custom gaming PCs obsolete.
Not all TMT trends are directly related to the pandemic. The music industry, for example, has definitely benefited from the growth of streaming media, but it has also cashed in on expanding use cases in social media, home fitness, gaming and cars, says Vyravipillai. “Music companies who hold rights are expanding and benefiting from new ways of measuring what’s popular, and they’re seeing how their catalogs can be used to further generate return,” he says.
Semiconductors are the critical technology enabling key megatrends that will drive a significant increase in demand in coming years.
Tech Innovation’s Structural Tailwinds
Another sector where demand is accelerating: Semiconductors. “Semiconductors are the critical technology enabling key megatrends that will drive a significant increase in demand in coming years,” says Xavier Nieto Gandia, an Executive Director who specializes in semiconductors investment banking. All of the big tech trends, from cloud computing and 5G wireless to artificial intelligence and the Internet of Things, require increasing semiconductor content.
Which explains why investors are closely watching this once again booming industry for the biggest potential winners. “A big question mark is how much of the technology value pie will semiconductors capture in the medium term?” Nieto says. Industry consolidation is another aspect to monitor, he adds, because “semiconductor companies are trying to gain scale faster, which means more and larger M&A deals going forward.”
The accelerating activity in the semiconductor industry intersected with a longstanding push for greater efficiency in the healthcare sector, made more acute during the pandemic. The inexpensive chip-based sensors that make possible the Internet of Things, as well as the Big Data technologies needed to both understand and manage the ever-growing ecology of interconnected objects—everything from thermostats to factories the size of small cities—are fueling long-term advances in healthcare. For example, sensors in complex medical devices, such as MRI and CT scanning machines, can now connect hospitals and diagnostic centers with suppliers to predict repair issues and automate maintenance, says Theodorou, the healthcare-tech banker.
Meanwhile, the rising risks of cyberattacks on corporations has raised the profile of enterprise cybersecurity companies, says Nieto, who also covers this sector. Increasingly, large companies rely on AI-based cybersecurity solutions to detect attacks and autonomously deploy defensive responses. Investors are trying to gauge which cybersecurity companies could gain the market edge: those with an integrated platform approach to detect and respond to potential enterprise-level cyberattacks—or vendors with best-of-breed point solutions to address specific cybersecurity needs, such as endpoint security, network security or email security, Nieto says.