Lucas Jackson/Reuters
The tech sector has produced some of the best performing stocks during COVID-19, with megacap tech companies leading the way.
But plenty of uncertainties remain as the pandemic is still a major concern for the broader market.
In light of this, Morgan Stanley published a note on Thursday listing the six key questions about the tech industry as we head into 2021, and what the firm thinks about each issue. The questions cover everything from changes in the e-commerce industry to its thoughts on Big Tech regulations.
Listed below are the six questions and Morgan Stanley's views about them:
1) How Much Will E-Commerce Decelerate in '21 and Who Will Decelerate the Most?
Morgan Stanley predicts the US e-commerce industry will grow just 8% in 2021, a big slowdown from the 40% expected growth this year. The deceleration is expected because this year's massive growth is likely a one-time event driven by more people shopping from home during the pandemic. The firm sees Amazon to continue to grow, while Etsy and Wayfair to see the sharpest deceleration in 2021.
2) What is Our Rank Order on the Ad Names for 4Q and '21?
Morgan Stanley remains upbeat about the general digital ad space, as spending continues to grow to capture the increased traffic around e-commerce and other online activities. It says some advertisers are planning to spend more in the fourth quarter because of the "still relatively weak TV audiences" during the pandemic. The firm is most bullish about Google heading into 2021.
3) Why are Video Games Trading So Poorly and Where Would We Deploy Capital?
Morgan Stanley believes video game publishers will do better, even if the lockdown-driven demand for video games subsides next year. It says the broader market is "under-appreciating the structural pull forward in gaming from shelter-in," as some investors anticipate big dropoffs in their stocks going forward. The firm says it's most bullish about Activision Blizzard because of the success of Call of Duty Warzone, and the expected release of Diablo. It's also bullish about Zynga.
4) What Are Our Favorite "Recovery/Vaccine Plays"?
Morgan Stanley says rideshare, travel, and dating companies stand to benefit the most if the recovery from COVID-19 starts to gain steam next year. Within these sectors, it's most bullish about Uber, Match, and Booking Holdings. It also noted Street estimates for ride-sharing companies for the rest the year "appear too high."
5) What Do We Think on Regulation?
While regulatory uncertainty remains at the top of investors' minds, Morgan Stanley doesn't expect any meaningful change to happen in the near term. In particular, it highlighted the difficulty and time it normally takes to pass a bill of this magnitude, and how policy proposals typically involve long debates, even if Democrats gain a majority within the Senate. "Any material policy change (in our view) around these enables of the digital economy (jobs, GDP, etc) will take time and be difficult," the note said.
6) What Big Picture Debates Are We Focused on for '21?
Some of the key topics that can become bigger issues next year include: how the work-from-home policy will change the companies' cost structures and spending pattern; how to monetize growth initiatives like Instagram Shopping and Google Shopping; how Amazon's logistics arm will grow and its impact on the company's 1-day shipping initiative; how video game publishers will capitalize on the growing number of users; and how the cost structure for ride-sharing companies will change, including the competitive environment of the food delivery sector.
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