COVID-19 Crisis Accelerates the Digital Transformation Trend

Digital transformation was already underway prior to the COVID-19 pandemic, but the resulting economic crisis has caused an acceleration, according to Franklin Equity Group’s Jonathan Curtis. He shares where his team is looking for potential opportunities within technology during the current period and beyond.

While the global community is still reeling from the uncertainty of a new reality under the COVID-19 pandemic, the tentative economic reboot that appears to be underway in many parts of the world is encouraging to us. However, we still see a number of structural impediments to strong global gross domestic product (GDP) growth, including the severe but potentially short-term impact of COVID-19 in the near term as well as longer-term headwinds such as high levels of debt across major economies, adverse demographics in developed markets, a lack of political will for serious structural reform, and elevated geopolitical and trade risk, just to name a few.

In this environment, we believe investors will place a premium on companies that can grow revenues and earnings—regardless of GDP growth—by addressing secular shifts in the way we interact with friends and family, shop and pay for goods and services, treat our illnesses and spend our leisure time. Overall, we seek to tactically anticipate the ongoing convergence of technology with other sectors which are increasingly tech-adjacent.

As we screen for new ideas and evaluate our current strategy, we continue to focus on identifying what we consider to be the highest-quality businesses (good margins and/or unit economics, strong balance sheets and agile managers) with the best long-term growth prospects trading at attractive valuations. We have also been looking to avoid businesses with (1) high leverage to the most negatively impacted industries; (2) weaker balance sheets; and (3) more challenged free cash flow positions in the current business environment.

Our team remains focused on the big theme of Digital Transformation (DT) and its associated sub-themes of cloud computing, new commerce, fintech and digital payments, data analytics, “edge devices” and the internet of things (IoT), artificial intelligence (AI) and machine learning, information technology (IT) security, collaboration and workflow, and 5G network communications. We believe the COVID-19 crisis is shining a bright light on the growing role of technology in our lives.