The Digital Transformation Isn’t Going Anywhere

Bearish investors are warning that the entire tech rally was built on the false premise of digital transformation. As evidence, they point to the weakness in technology shares on Monday.

Don’t worry, their concerns are misguided. And they’re even more wrong about the digital transformation because they’re misunderstanding the bigger trend.

It’s easy to be negative about the prospects for businesses that have been richly rewarded by investors. I have spent the better part of three decades picking through bearish arguments for Amazon.com, Inc. (Nasdaq: AMZN, Rated “B”) and later NVIDIA Corp. (Nasdaq: NVDA, Rated “B-”).

The central thesis is always the idea investors are way too optimistic about the core business. It’s an Amazon.com is just this, or NVIDIA is really just that approach. The valuations, bearish investors argue, can’t be justified by financial metrics like price times forward earnings or sales.

Too often, these arguments assume a finite market based on old business practices.

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For example, Amazon.com seemed absurdly overpriced when the business was selling books and other media only. Forward looking investors saw the model had the potential to move far beyond those categories. Today, its business is mostly about collecting a fee for fulfilling sales at third-party partner stores, or selling proprietary, high-margin white label goods.

The business model changed. It became both leaner and more leveraged at the same time, which is a terrific combination.

NVIDIA managers transformed the business from a sleepy provider of computer peripherals that made video gaming more exciting, into the gatekeeper of a new way to compute information.

It wasn’t easy to see the transition coming. There were plenty of naysayers, but it did happen, and it created a fantastic amount of shareholder wealth.

Since 2009, NVIDIA shares are up 6,260%.

What’s cool is the roadmap is being laid out for other companies to do the same with new platforms. It all begins with digital transformation, the idea of using data to inform and create new business models.

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I have written often about Microsoft Corp. (MSFT, Rated “B”), Salesforce.com, Inc. (NYSE: CRM, Rated “B-”), MongoDB, Inc. (Nasdaq: MDB, Rated “D+”) and others. Although these companies have been expensive in the past, savvy investors would be wise to use this pullback as a buying opportunity.

And there are others to keep an eye on.

For example, Teledoc Health, Inc. (NYSE: TDOC, Rated “D+”) operates the best-in-class telehealth platform. Shares of the fast-growing business collapsed 13% Monday on news that Pfizer Inc. (NYSE: PFE, Rated “C+”) has a COVID-19 vaccine that is 90% effective. The vaccine is good news for the country, but telehealth is not going away just because vaccines are near. Teledoc shares are up 112% in 2020.

So, don’t listen to the tech bears. There are still amazing opportunities in the market. These examples are just the tip of the iceberg when it comes to the overall trend.

And the digital trends set in place are here to stay.

Best wishes,

Jon D. Markman