We are living during a time of incredible digital transformation. Agility is the new reality of the business world. During these challenging times, companies have been forced to adapt and innovate. Throughout history, many of the largest technological and economic leaps were forced by incredible circumstances, such as during World War II. I believe that the current incredible circumstances that have forced many businesses to digitize will play out as the basis for a large technological and economic leap forward.
We’ve seen the hype around tech companies such as Tesla, Apple and Zoom reach fever pitch recently, but in reality, although the FAAMG (Facebook, Amazon, Apple, Microsoft and Google) companies account for 21% of the S&P 500, the Technology sector accounts for only 35 out of 500 global Fortune 500 companies. (This figure does not include Amazon, which is in the Retailing sector.) However, Technology is one of the most profitable sectors. This means we are still at the beginning of the new big tech cycle, which will become a much bigger part of our lives.
On the one hand, this presents opportunities for investors, but on the other hand, businesses will continue to face transformation. Even before the pandemic, several tech giants reached trillion dollar valuations, and I believe there will be further growth to come. The same idea applies to China’s tech market giants, ATM (Alibaba, Tencent and Meituan Dianping). Some analysts like to compare the current price-to-earnings ratios and weighting of major tech companies in the S&P 500 to the dot-com bubble, but I disagree with that comparison. Modern tech giants have real revenues and have grown by double and triple digits in the past few years, and they continue making real impact by replacing the legacy ways of doing business. This is not only growth powered by the hype of Robinhood investors; it is also real business growth powered by forced digitalization.
One of the examples I like to use is my local pub in Greenwich I go to with my pals. Just a few months ago, it was a traditional pub with an old chip and PIN point-of-sale system, dated menus, waiters with pen and paper and a cash till. But now, the experience has been completely digitized for the long-term benefit of customers and the business. Each customer scans the barcode on their table, orders from the digital menu and checks out with Apple Pay.
Massive investments in digital transformation are yet to come to a lot of traditional industries. Another good example is the industry in which I work. Private banking still often uses legacy core banking systems from the ’60s that rely on paper forms and wet signatures. But now, our industry is being forced to speed up its digitalization regardless of its conservatism and longtime preference for doing things manually.
Because of these kinds of digital transformations, coupled with the continued growth of tech giants, I believe we will see impressively positive economic and technological implications of the current short-term economic downturn over the next 5-10 years.
This article originally appeared on Forbes.
