Tech stocks’ COVID-19 surge could face turbulence in 2021

That unexpected surge meant that digital transformations across the board needed to happen on a “now” scale rather than a “later” scale. All of a sudden, everyone needed a “digital contact center” to replace in-person dealings, and rushed into whatever seemed to work at the time, Maribel Lopez, principal analyst at Lopez Research, told MarketWatch in an interview.

“Transformations that had three-year road maps were, like, a month and a half,” Lopez said. “Surprisingly, the cloud-computing infrastructure did not crumble, but that scalability does not come without a cost.”

The forecast looks a lot less cloudy going into 2021, Lopez said, as many businesses reconsider the moves they made during 2020’s rush into the cloud.

“While it looks like everything’s been bought, I think there was a lot of try-and-buy that was rolled out by technology vendors in 2020, and a lot of the ‘buy’ has to happen in 2021 and that ‘buy’ might not be with the person you’re using now, even though it’s painful to move from vendor A to vendor B,” Lopez said.

Investors obviously expect growth to continue at an accelerated pace. As of Monday, the tech-heavy Nasdaq Composite Index
COMP,
+0.15%
has surged 44% in 2020, while the S&P 500 index
SPX,
+0.13%
is up 16%. Of the S&P 500’s 11 sectors, the tech sector accounts for 28% of the index’s weight, based on the SPDR S&P 500 ETF Trust
SPY,
+0.14%,
which mirrors the weighting of the S&P 500.

Cloud computing proved to be tech’s clear winner as it quickly became the primary infrastructure for millions of people having to work and learn from home, as evidenced in the First Trust Cloud Computing ETF
SKYY,
+0.07%
rallying 60%. Other tech sectors showed equally strong gains, with the iShares Expanded Tech-Software Sector ETF
IGV,
-0.01%
rising 55%, the PHLX Semiconductor Index
SOX,
+1.67%
up 49%, and the ETFMG Prime Cyber Security ETF
HACK,
+0.45%
up 41%.

Big tech winners in 2020

Experts told MarketWatch that cloud computing and software will continue to be a focus for investors and enterprise customers, but returns will likely be less predictable. Here’s what they expect for the hottest tech sectors:

Shuffling expected in the cloud

The surge in demand for cloud software led to big returns, and the biggest players are looking to find new ways to reach out to customers and continue growing.

A prime example of that was evident in the August earnings report from cloud-based customer-relationship software company Salesforce.com Inc.
CRM,
-0.03%.
Quarterly revenue at the company surpassed $5 billion for the first time, up more than $1 billion from the year-ago period, and Chief Executive Marc Benioff called the strong results “humbling” because they had been turbocharged by the crisis. Salesforce followed up on that show of strength in the following quarter’s earnings report when it said it would acquire business messaging company Slack Technologies Inc.
WORK,
+0.21%
in a deal worth $27.7 billion.

Forrester analyst Matt Guarini, who specializes in research for chief information officers, expects many businesses to start shifting to hybrid in-person/at-home work environments as they seek to outperform the competition.

“We think some people have made some less-than-optimal decisions in 2020,” Guarini told MarketWatch. “If you’re not making the right decisions, if you’re just making rash decisions so you just keep operating, eventually those are going to catch up with you.”

Guarini expects businesses to try ways of preserving remote work capabilities while fostering the creative energy that only comes with in-person interactions as executives come to realize that remote-only just allows their companies to get by.

“We’re not going back to the way things used to be, but we can’t keep up the way we’ve been going since March,” Guarini said. “While we’re still delivering, I don’t think we have the long-term answer for that. It’s all going to change again.”

Chip demand expected to remain strong long-term

Even as companies like Apple Inc.
AAPL,
-0.85%
and Microsoft Corp.
MSFT,
-1.10%
focus on chips developed in-house, analysts expect continued demand for chips used to power AI in data centers, computer gaming, and 5G phones, as well as public cloud services from Amazon.com Inc.
AMZN,
-1.09%,
Microsoft and Alphabet Inc.’s
GOOG,
-1.09%
GOOGL,
-1.22%
Google. That demand, however, may be weak compared with 2020.

As the world moves to get out from under the shadow of COVID-19, Bernstein analyst Stacy Rasgon said he’s “more constructive on the long-term prospects for semis given the increasing importance of the sector, both functionally and strategically.”

Near term, however, there are risks, and he prefers to be selective for companies that either “possess long-term secular growth stories that can stay attractive as we look through the near term,” and “potentially more cyclical, but less expensive names with less [work-from-home] exposure.”

Cowen analyst Matthew Ramsay said that “questions remain on whether 2020’s demand is sustainable, and servers reflect a tale of two markets, with enterprise and government notably weak, but resilient hyperscale demand.”

Evercore ISI analyst C.J. Muse, on the other hand, is outright optimistic on the belief that chip demand is “just getting started,” even with chip stock prices significantly higher than a year ago.

Muse expects chip sales to grow 14% to $500 billion in 2021 as organizations continue their digital transformations and product cycles for 5G, AI and PC products, and products for autos and networking recover.

Cybersecurity outlook uncertain given huge attack

The massive cyberattack discovered in December against U.S. assets through software sold by SolarWinds Inc.
SWI,
-0.20%
brought cybersecurity back to the forefront, but while the attack could boost demand for cybersecurity, it also shows that current products can’t catch everything.

Mizuho analyst Gregg Moskowitz expects security sub-segments to benefit from organizations rushing to secure their digital assets, acknowledging “it’s difficult to truly pinpoint the winners in a highly fluid situation.”

In endpoint security, Moskowitz expects CrowdStrike Holdings Inc.
CRWD,
+2.12%
to benefit. In the vulnerability management space, he prefers Qualys Inc.
QLYS,
+0.83%,
Rapid7 Inc.
RPD,
+1.59%
and Tenable Holdings Ltd.
TENB,
+1.99%.
For cloud access and protection. Moskowitz picks Palo Alto Networks Inc.
PANW,
-0.12%
and Zscaler, while privileged access management companies to watch are CyberArk Software Ltd.
CYBR,
+0.85%,
Okta, Ping Identity Holding Corp.
PING,
+1.32%
and SailPoint.

“There’s not a lot of hope and optimism in the cybersecurity space right now,” Maribel Lopez told MarketWatch. “That most cybersecurity buyers are in the mode of ‘Hey, I’m not sure if I can prevent things, I just want to be responsible.’”

Lopez said businesses want to be able to show that if anything does happen later, they can say they acted responsibility, in contrast with other large cyberattacks over the past few years, such as “the whole Equifax thing.”