Growth in a post-COVID world


In a post-COVID world, today’s trends will continue to accelerate and the digital revolution will continue to run, which is why an exposure to growth oriented equity investments is important for client portfolios.

Growth stocks have been on an upward trajectory for years, a trend that has accelerated due to the COVID-19 pandemic. In this article, GSFM shares insights from Munro Partners, global growth investment managers.

While classifying stocks as either growth or value is a relatively simplistic view, it’s one that’s had particular relevance in the current environment. Growth stocks – those sought by investors looking for capital appreciation – have been a beneficiary of markets in recent history, and a trend that’s accelerated during the COVID-19 pandemic.

What’s driving growth stocks in the current environment?

Earnings growth drives stock prices. It’s a truism that holds through all market conditions and all cycles, and the COVID-19 induced market volatility is no exception. It is important for investors to look through the volatility, beyond the short-term gyrations, and to focus on the companies that will be better off on the other side of this crisis.

A standard explanation as to why growth investing has been doing well is that interest rates have fallen so markedly. In a post-COVID world, interest rates have moved even lower, so this explanation would suggest growth stocks will continue to appreciate.

While interest rates play a role, there’s more to the story. Consider the following examples:

  • Jeff Bezos set up a bookstore in his garage 20 years ago, and it’s now worth $1.6 trillion
  • Reed Hastings set up a DVD delivery service in California and turned it into Netflix.
  • In Australia, Mike Cannon-Brookes and Scott Farquhar put software online at the University of New South Wales and turned it into Atlassian, which is now worth $50 billion.

It’s clear there’s something more at play than simply falling interest rates – and that ‘something’ is the acceleration in compute power.

The digital revolution

Like every generation before us, we are living through a revolution. Earlier generations have been through the oil and gas revolution, the rail revolution and the retail revolution.

We are currently living through the digital revolution.

This digital revolution is being driven by Moore’s law:

In 1965, Gordon Moore made a prediction that would set the pace for our modern digital revolution. From careful observation of an emerging trend, Moore extrapolated that computing would dramatically increase in power, and decrease in relative cost, at an exponential pace. The insight, known as Moore’s Law, became the golden rule for the electronics industry, and a springboard for innovation.[1]

In short, computers are continually becoming more powerful, and as they become more powerful, compute power grows exponentially (figure one).



By way of example, in 1971 Intel’s first semiconductor chip had 2,000 transistors on it. Every two years it doubled the transistors and halved the price; in 2020, Jensen Huang’s new transistor at Nvidia has 54 billion transistors on it. The result? Computers are getting more powerful.



Early in the digital revolution, computer users were able to send an email, then moved to being able to search, to being able to support internet connectivity on smartphones, to being able to stream movies and sport. As computers and the internet became more powerful, a greater number of platforms and software were enabled (figure two); be it video conferencing from Zoom, customer management tools from Salesforce or cloud services from Amazon. As Moore’s law continues to fan the digital revolution, the growth in computer power – and the possibilities this presents – will expand.

The impact of COVID-19

If there has been one consequence of COVID-19 that everyone can agree upon, it’s the impact it has had on digital enterprise, and the way it has accelerated the take-up of technology.

Numerous data points indicate an acceleration or pull forward of demand in technology, whether in team collaboration tools, activation of digital payment accounts, accelerated eCommerce sales or significant demand for COVID testing to enable the re-opening of the economy.

Zoom, Webex and Microsoft Teams, among others, are now mainstream meeting tools that have become the mainstay of business continuity. Our children are learning from home with them as well.

When it comes to digital enterprise, the current crisis will only accelerate the move to cloud-based systems and software. Similarly, eCommerce has been a growing trend and this crisis means the shift will happen even faster than initially predicted. From that point of view, Amazon and Alibaba are two names that are set to benefit.

Given an overall slowdown in commerce, payments overall will take a hit this year; but ultimately the shift to digital will only accelerate and PayPal is set to be a beneficiary in this space.

Winners and losers

An examination of the big platform companies that have been successful and won market share shows each is spending heavily on research and development to effectively grow what their business can do digitally in order to grow their sales. Shareholders are rewarding companies for it.



At the same time, the so-called value companies that aren’t spending on their business and doing so-called shareholder friendly actions such as dividends and buy backs, are actually not being rewarded because ultimately, they don’t have sales growth. Shareholders are beginning to understand that short-term multiples do not drive long term performance.

The market is quite correctly rewarding companies for investing in their own business. Those that invest in themselves are more likely to win. And this is a game of very few winners and lots of losers, and it’s more pronounced in a digital world.

Case study: The cloud computing ecosystem

Rather than trying to predict the direction of economies or markets, focusing on identifying areas of structural growth will help find these few winners.

With so many areas of disruption occurring at once post COVID-19, there are a number of opportunities ahead over the medium to long term. One that looms large, is the cloud computing ecosystem – which includes Infrastructure-as-a-Service (IaaS) and Software-as-a-service (SaaS). This is probably the biggest theme of the coming digital revolution and there are compelling reasons why its growth is set to accelerate.

IaaS is a form of cloud computing that provides virtual computing resources over the internet. IaaS offers a lower cost, more flexibility and scalability. IaaS implementation can be compared to the railroads of the industrial revolution, but in this instance, providing the infrastructure, speed and computer power without geographical constraints.

SaaS is the application layer of cloud computing. When software is hosted in the cloud, the end user can access the application anywhere, anytime over the internet. So if IaaS is the railroad, SaaS is the locomotive, delivering the software product to consumers and business alike.

To put the scale of this opportunity into context, worldwide IT spending sits at $2.1 trillion a year. This spending is split between software, devices, IT services, and data centres. But there is a structural change developing with three of the big IT spends – of software, IT services and data – where they are increasingly being stored in the cloud.

Despite the huge growth in cloud computing over recent years, it only represents less than 10% of the total global IT expenditure. Obviously, there is a very long runway of growth ahead, and there are clear reasons why this growth is here to stay. Cloud computing is a one-stop shop that continues to take a bigger share of an increasing IT market spend. Consumers like ‘the cloud’ because it is far more simple, secure and cheaper than traditional methods of software usage.

Businesses like the cloud as well. For software companies and corporates globally, the cloud provides real and discernible benefits: companies can run virtually any application or operating system on the infrastructure and they can easily scale their use of the service, be it up or down, depending on demand.

It is no wonder that companies are increasingly migrating to the cloud in some form, and when they do, they are going through the big IaaS vendors including Google, Microsoft, and Amazon, and in the developing world, Alibaba.

These four companies are the big winners from the cloud computer trend. They provide scalable, commoditised computing power via their network of data centres and servers. Collectively, they account for 94% of the global IaaS market.

Meanwhile, the underlying cloud computing providers are growing strongly and they have attractive business models. They operate on high margins – which can be greater than 90% – they are very scalable and revenue is recurring – with low churn and customers on long-term subscriptions. Additionally, they are paid in advance of providing the service so have a steady secure flow working capital.

As the big four IaaS players continue to benefit from the migration of workloads to the cloud over the next five years, they could easily see a doubling of their cloud infrastructure revenues. Many of them will continue to improve margins as they enjoy the benefits of scale, which will ultimately contribute to sustained earnings growth.

The growth versus value argument is about perspective: either an investor looks at next year’s multiple and decides a company is expensive, or they see it as cheap because they are looking at what happens over the next 10 years.

In a post-COVID world, today’s trends – combined with Moore’s Law – will continue to accelerate and the digital revolution will continue to run, which is why an exposure to growth oriented equity investments is important for client portfolios.

The information included in this article is provided for informational purposes only. The information contained in this article reflects, as of the date of publication, the current opinion of Munro Partners and is subject to change without notice. Sources for the material contained in this article are deemed reliable but cannot be guaranteed. We do not represent that this information is accurate and complete, and it should not be relied upon as such. Any opinions expressed in this material reflect our judgment at this date, are subject to change and should not be relied upon as the basis of your investment decisions. All reasonable care has been taken in producing the information set out in this article however subsequent changes in circumstances may occur at any time and may impact on the accuracy of the information. Neither Munro Partners, GSFM Pty Ltd, their related bodies nor associates gives any warranty nor makes any representation nor accepts responsibility for the accuracy or completeness of the information contained in this article.

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