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The Disparity Between Winners and Losers

01 July 2020

This material is directed at investment professionals and qualified investors (as defined by MiFID/FCA)

By Brandt Blimkie, Vice President Analyst

Alex Bernstein : Hello, I’m Alex Bernstein and you’re listening to the Alger Podcast, Investing in Growth and Change. At Alger, many of our recent thought leadership pieces have focused on the wide disparity between the types of companies that are winning and losing in the current market environment, and the role that tech might play with those companies. To try to understand this disparity a bit more, I’m talking with Alger Tech Analyst Brandt Blimkie. Brandt, thanks so much for joining me this afternoon.

Brandt Blimkie :  Thanks, Alex.

Alex :  Brandt, can you tell me a little about this disparity between companies?

Brandt :  So, there are certainly beneficiaries and losers in this environment. There are companies that are helping transition the economy to work from home, the digitization of different aspects of our work. Think of online grocery delivery or e-commerce, videoconferencing so we can hold this conference online with different salespeople. So, there are companies that are benefiting in this environment as well as companies that are struggling, certainly the ones that are struggling are ones with more physical locations based on physical foot traffic where maybe people are more reluctant to travel. So, there’s certainly been a discrepancy in those who are benefiting in this environment from those who are getting hurt.

Alex :  Where are you seeing some of the biggest discrepancies?

Brandt :  So, there’s a discrepancy right now, we think, between high growth tech companies and value tech companies. We think the discrepancy is pretty wide in terms of valuation. And this is not just recent with COVID-19 – but over the last five to ten years we’ve seen just this big discrepancy between value tech and growth tech as the winners have become larger and the losers and laggards have continued to trail. Now, a lot of legacy tech that is considered value tech, some of those companies are levered. Some of those companies have products that are in secular decline, and so the argument to invest in one of those companies is that the economy is going to recover smoothly, and then these products, these companies, won’t have leverage issues, liquidity issues, and so the valuations are too cheap for where they’re trading. That’s contrasted with some of the higher growth software companies and other tech companies that are benefitting in this environment. Where the debate now is, are these priced too high for fundamentals that could eventually slow once the economy recovers? For example, will we use as much videoconferencing if everybody goes back to work? Have we purchased as much security products as we need to secure our employees? Will we need as many of those services if we return to a normal, or are we just going to be in a “new normal” where we’re utilizing just more of those services going forward?

Alex :  And what do you think the answer to that is?

Brandt :  I think this is another time in our economy where we’re seeing significant structural changes take place, and certainly a lot of companies we talk to, particularly in the tech space, are talking about more efficient ways of doing things, now that they found that it’s actually not that bad having their employees work from home. Now, we’ll have to see if once the economy reopens if that holds true, but right now companies are saving significantly on travel costs. That’s made it more efficient for salespeople to talk to the customers and sell products if they don’t have to get on a plane to talk to the customer. They can land a deal of similar value and you’ve significantly increased the value delivered to your company. It might be harder to land that deal over a videoconferencing tool. So, I think that part of the equation still remains to be seen.

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