Post-Pandemic Media: More Screen-time For Everyone

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SEE LAST PAGE OF THIS REPORT Paul Sagawa / Tejas Raut Dessai

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April 13, 2020

Post-Pandemic Media: More Screen-time For Everyone

Hundreds of millions of people worldwide are isolated in their homes with a lot of time on their hands. This has had obvious effect on the consumption of media. Reports suggest total internet traffic is up 50-70% month over month in developed markets, with consumer gaming, video streaming, social media, and messaging all showing step function jumps in users and usage. Even Nielsen ratings for linear TV are up 18% YoY after 5 years of declines. The bad news is that advertising spending is down, with major categories – travel, retail, movies, automobiles, etc. – hammered by the pandemic. Looking forward, we see permanent changes in 5 areas: 1. Gaming – Ecosystem (e.g. online play, video streaming, esports, gaming social media, etc.) has gained significant momentum at the expense of traditional media types; 2. Video – Shift from linear TV and theaters to streaming is accelerating to a new trajectory, will reward reach and content depth; 3. Social Media – Cements leading services roles in connecting people, distributing info, may soften political pressures; 4. Live Events – Will be slow to return, many entities will be badly damaged; and 5. Advertising – Will rebound faster than many suppose, and greatly strengthens digital at the expense of other media. Our recommended list: Gaming – MSFT, ATVI, TSG, Nintendo; Video – NFLX, GOOGL, AMZN; Social Media -FB, TWTR, PINS, SNAP.

  • At home leisure time is up about 50%. Prior to the COVID-19 crisis, the average American spent about 5.3 hours a day in at home discretionary activities. We believe that the elimination of commutes, loss/reduction of work and study, and the curtailment of errands, meetings and socializing is increasing this by about 50%. This is reflected in the 50-70% MoM increase in total internet traffic for March.
  • Engagement up, advertising spend down. All major forms of at-home leisure show significant growth in activity over the past month. Gaming has seen a 155% bump in console sales, a one-week 63% mid-March spike in European game downloads, and reports of big jumps in traffic on game streaming platforms. Video streaming platforms are up big too – reports suggest 50-75% increases in NFLX traffic in many communities and both NFLX and GOOGL’s YouTube are reducing downstream speeds to dampen the impact on available network bandwidth. Social media platforms FB, TWTR, PINS and SNAP are all seeing engagement hit new all-time highs. Even linear TV has seen ratings jump 18% YoY. In contrast, the hit to live entertainment has been catastrophic and advertising spending is seen down 30-40% YoY, with traditional media taking a bigger hit than digital.
  • Gaming momentum will continue after the lock down. This crisis has accelerated changes that were already afoot in the gaming sector. (Game Streaming: Not Everyone Can Win) Game play and spending will pull back a bit post-crisis but will remain on a higher trajectory than before. Digital distribution is the norm, subscription services are gaining traction, but streaming services are still not quite ready. Console/PC games will benefit a bit more than mobile, social games will sustain their momentum, and online multiplayer games will dominate. Game ecosystems – e.g. e-sports, streams, social gaming platforms, etc. – will expand, drawing engagement and advertising from other media. Delays in 5G will hold back mobile and streaming games. Online gambling will thrive, even once public venues reopen.
  • Streaming wins sooner. Linear TV and movie theaters were already in decline, the COVID-19 crisis is just hastening their demise. (The End of TV: Media Strains to Adapt to Streaming Era) Studios have moved films directly to streaming platforms. Live sports, the lifeblood of Pay TV, are gone for the foreseeable future. Fall season TV shows are not shooting. Fledgling video streamers may also have issues – without production, thin libraries will yield churn and emerging market adoption may slow – but the flood of new subs moves up everyone on the race to critical mass. We see NFLX, DIS Plus, HBO Go, Prime Video and YouTube as obvious long-term winners the others have better odds of relevance than they did before the crisis.
  • Social networks perfect for social distancing. Engagement is up big on all major social networking platforms. Even as daily life returns to normal; we believe reliance on these franchises for news access and participation in virtual social gatherings will remain on a higher plane. This bodes well, not just for FB but for TWTR, SNAP, and PINS too. We also suspect that governments may be less inclined to attack these platforms for anti-trust, privacy issues or disseminating false information post crisis given their relatively strong civic performance during the pandemic and changes in political priorities.
  • Live entertainment will be slow to recover. The strain on hospital capacity may be ready to abate and with wide-spread testing coming available, public spaces may start to reopen, but the impact on big events will continue for months. Attendance at theme parks, sporting events, theaters, and other large gatherings will be pressured, particularly if fears of a second wave of infections rise. This is opening the door to alternative entertainment options – e-sports, virtual theme parks, live streamed events, etc. – that may not have gained traction without the crisis.
  • Ad spend will bounce back to digital. During the 2009 recession, US ad spending dropped 13% YoY and took nearly two years to return to prerecession levels. We suspect that the decline this year will be significantly larger given the breadth of the economic impact of the crisis but are hopeful that resolution and government stimulus will spur a sharper recovery. However, this episode is likely to have meaningful effect on the ad mix going forward. Newspaper advertising never recovered from the 2009 recession – this time, the losing category is likely to be linear TV. Digital platforms, with huge boosts to engagement, a flexible bidding process, and precise targeting, will be greatly favored and should sustain that momentum into the future. Traditional media have already begun to refocus on streaming, cord cutting will accelerate, and viewership will return to a harsh downward trajectory.
  • Digital infrastructure is the common denominator. We note that demand for these digital services will tax cloud datacenters and drive significant investment in growing capacity. Here the beneficiaries are component makers like INTC, AMD, NVDA, XLNX, STX, and WDC. This will also create opportunity for CDNs like AKAM, NET and FSLY.
  • Our top picks. Breaking our best media ideas into 4 categories: 1. Gaming – MSFT, Nintendo, ATVI, and TSG; 2. Streaming – NFLX, GOOGL, AMZN; 3. Social Media – TWTR, FB, PINS, SNAP; 4. Digital Infrastructure – NVDA, AMD, STX, FSLY.

Boredom Changes Everything

42 states have instituted social distancing mandates. Workplaces, schools, stores, restaurants, movie theaters – all closed. No sports, no concerts, no church services or happy hours. No vacations, day trips, or family gatherings. Before the crisis, the average American spent about 4.25 hours a day at home engaged in leisure activities. COVID-19 has raised this by more than 50%.

Suddenly, we are all bored teenagers glued to our phones, iPads, PCs and game controllers. Internet traffic is up 50-70% in just weeks. Game consoles have sold out, unit sales more than doubling week on week in mid-March. Verizon reported gaming related traffic up 75% in March vs. February. Streaming video traffic is also up big – 50-70% in some reports – and NFLX and GOOGL have started to throttle video quality to conserve bandwidth. FB, SNAP, TWTR and PINS have reported that their services have all established new all-time highs in usage on every metric that they use. Even linear TV, which had limped to 5 consecutive years of falling viewership in the US, is posting 18% YoY ratings increases.

Experts suggests that this will last for at least weeks and perhaps months, and even when we start going back to work, restrictions on large gatherings will remain. Moreover, the pandemic experience seems certain to affect lasting changes in consumer behavior and societal norms. More people will work at home; people will be more willing to have their groceries and pharmaceuticals delivered to their homes; and there will be more screen-time. We see five major ways in which the media landscape will emerge from the crisis different than it was:

  1. Games – Before COVID-19, video games were already a $150B business growing at better than 10% per year, but that extraordinary growth was a bit under the radar. The pandemic puts this sector square into focus – expect a new higher trajectory driven by online social gaming and a rich ecosystem that includes e-sports, streaming, and social gaming platforms.
  2. Streaming Video – Linear TV viewing may be up, but without sports for a few months and new production on hold, the $100/month fee is very vulnerable for households under financial pressure. Theatrical releases are on indefinite hold and consumers may be reticent even if they are allowed to go. All of this will hasten the transition to streaming as the primary mode for video entertainment.
  3. Social Media – The political rhetoric is mostly gone as the big online platforms step up on policing false content and as privacy and anti-trust become secondary concerns. While FB will remain dominant, we expect apps like TWTR, SNAP, PINS, Discord, and Houseparty to gain new traction.
  4. Live Events – Until there is a vaccine and the threat of new waves of infection wanes, live events will suffer – theme parks, sports, theater, concerts, etc. It may take years to return to 2019 levels of attendance.
  5. Advertising – Ad spend is always down in a recession but tends to bounce back. Still, the crisis gives buyers and agencies time to reconsider their strategies. The 2008 financial crisis was the final nail for newspaper advertising. This time it may be linear TV. Meanwhile, we expect digital to thrive.

With this perspective, we see 4 categories that we expect to see long term benefit from the crisis, with top picks in each: 1. Gaming – MSFT, Nintendo, ATVI, and TSG; 2. Streaming – NFLX, GOOGL, AMZN; 3. Social Media – TWTR, FB, PINS, SNAP; 4. Digital Infrastructure – NVDA, AMD, STX, FSLY.

Be Careful What You Wish For

Suddenly, almost everyone has a lot more leisure time at home. As of April 7, 42 states and 100+ countries had issued a partial or complete lockdown affecting more than a third of the world’s population, essentially closing all businesses deemed “non-essential” and banning all public gatherings. Pre-crisis, Americans spent about 5.3 hours per day in various at-home leisure activities, such as watching TV or surfing the internet (Exhibit 1, 2). Eliminating a portion of work and study time, along with all errands, travel and group leisure activities, suggests that we all have more than 2 hours every day of additional free time at home.

Not surprisingly, internet traffic has spiked, up 50-70% in less than a month’s time (Exhibit 3). The numbers for video gaming are through the roof – console unit sales in Europe more than doubled in a single week in March with a 63% jump in the sales of individual games. Viewing hours on Amazon’s gaming video streaming service Twitch were up 31% over a 2-week span in March. Verizon reported that video game related traffic was up 75% MoM on its network during March. Nintendo’s newest iteration of its Animal Crossing game sold more units in its first week on the market than any of its predecessors had sold in their entire histories and spawned a flood of joyous (Exhibit 4) Animal Crossing memes across social media. Online gambling, legal only in limited jurisdictions, is also on fire. With casinos and friendly poker games on ice, online betting sites report 20-100% increases in new player registrations. Video games had always been treated as something of an immature stepchild by the media industry, but this performance during the crisis looks like something of a breakout party.

Exh 1: Avg. Daily Time Spent in Leisure and Sports Activities by Americans, 2018

Exh 2: Avg. Time Spent in Select Other Outdoor Activities by Americans, 2018

Exh 3: Total Monthly Website Visitors for Top Internet Platforms in Billions

Exh 4: Increase in Sales of Video Game Industry due to COVID-19, March 2020

Streaming video is up too. Subscription services are reporting extraordinary month-over-month gains – Disney’s reveal that it has hit the 50M sub number for Disney+ a year ahead of plan is the biggest surprise but almost everyone is seeing serious upside. Viewing is also skyrocketing. Netflix and YouTube have begun throttling the resolution of their streams to relieve pressure on overall internet capacity, while unofficial reports suggest that viewing hours on the two platforms could by up more than 50% vs. February. Apple TV Plus may be the only disappointment – new sub growth jumped just 10% off of a small base, likely due to weak iPhone sales (new phones come with a free trial subscription). The just launched short form subscription video platform Quibi, which focuses on professionally produced clips for smartphone viewing, saw 700K installs on its first day, but could suffer as the flood of content available on larger screens in the home render it less compelling. Linear TV watching is also up, but not by nearly as much as streaming alternatives. However, as the crisis wears on, the absence of live sports and an ever more shallow pool of new content could begin to take a toll.

Social Media is another popular diversion for the stuck at home set. Facebook, Twitter, Snap and Pinterest have all acknowledged record high usage on their platforms. Facebook reported that its messing applications, Messenger and WhatsApp saw a 50% spike in usage in hard hit markets like Italy and Spain in the third week of March, with a doubling of video calling. Social networks have also become key channels for distributing information about the crisis, with Twitter taking particularly salient role, devoting new resources to clearing false information about the pandemic from its platform.

Meanwhile, companies that deal in live entertainment – theme parks, theaters, sporting events, concerts, etc. – are obviously in a world of hurt. Advertising spending will also be down hard in 2Q20, with a number of normally big spending categories – travel, retail, automotive, and others – shutting down campaigns. This will hurt every media category that depends on ads, but we expect the spending to pick up sharply once the lifeguards let everyone back in the water.

A Brave New World

The post-apocalyptic media landscape is likely to be very different. Many consumers will have kicked old habits that had been keeping traditional media going. Advertisers will be ready to embrace changes (that they knew were coming) ahead of schedule and on a steeper trajectory. Traditional media companies will trip over each other trying to get an edge in the new world. All of this will play out as restrictions loosen and the world’s citizens get back to work, back to school and on to their new ways of doing things. We break the changes into 5 categories: 1. Gaming; 2. Streaming; 3. Social Media; 4. Live Events; and 5. Advertising (Exhibit 5).

Exh 5: Changes faced by the media industry can be broken into 5 segments

Gaming – On Track to Be the Most Important Media Category for the Next 50 Years

We wrote about gaming back in November 2019. (It seems a long time ago – Game Streaming: Not Everyone Can Win) At that time, it was a $150B global market, growing at a healthy 10% clip and already bigger than book publishing ($121B), newspapers and magazines ($130B) or movies ($136B) and not too far off of the declining linear TV market ($265B with some double counting of pay-per-view movies). In that piece we talked of a future where the games were just part of a broader ecosystem comprising game-related

Exh 6: Breakdown of Global Gaming Sales by Geographic Segments, 2019

Exh 7: Concurrent players for popular online games are at the highest level ever

social networks, streaming video, and e-sports. Game publishing is being democratized by digital distribution, empowering developers and weakening publishing brands. Game preferences are shifting toward online, multiplayer titles and casual social games. Enabled by ultra-low latency 5G networks, we imagined streaming game play gaining traction (Exhibit 6, 7).

Except for that last point – the one about 5G and streaming game platforms – the COVID-19 crisis has accelerated all of it. Younger people with more time on their hands have turned heavily toward gaming – playing games, watching games and talking about games. While engagement and spending will likely pull back once players are back to work and school, we expect all gaming activity to establish a new long-term growth trajectory higher and steeper that it had been pre-crisis. This activity within a desirable young demographic will also draw new advertisers to e-sports, video streams, and into the games themselves. The buildout of 5G coverage and the resolution of technical hurdles to high performance game streaming remain future catalysts that could further accelerate growth.

This may also be the push for which the online gambling biz was looking. With casinos closed for now and the volume of travelers likely to be depressed long after the pandemic peak, online gaming becomes much more attractive to gamblers (Exhibit 8). With state tax receipts badly compromised from the costs of dealing with the crisis, the political environment for further legalization could be improving.

Exh 8: Financial and Valuation Snapshot of Top Game Dev & Publishing Stocks

Streaming Video – Linear TV and Movie Theaters Rushed into Obsolescence

We have written periodically on the so-called “streaming wars” (The End of TV: Media Strains to Adapt to Streaming Era) which to us seems more like a race than a battle.

Exh 9: US Direct to Consumer Video Streaming Sign Up Volume, March 2020

Most services have reported a jump in new subscriptions since the onset of the pandemic, with Forbes reporting a survey showing big week over week jumps in new subs for almost everyone during the weekend of March 14 (Exhibit 9). Disney+ nearly tripled its new subs and HBO Go was up 90%. Netflix, which began the quarter with nearly triple the number of total US subs vs. Disney+, was up an impressive 47% (Exhibit 10). Amazon’s Prime Video, included as a part of Prime membership, is harder to track but undoubtedly up nicely given the huge engagement with e-commerce giant. In contrast, the much-publicized Apple TV Plus service was up just 10%, likely owing to slow sales of new iPhones which come with an automatic free trial subscription. Industry analyst Strategy Analytics has raised its 2020 forecast for new global streaming subscriptions by nearly 50% to 143M across all services and markets.

Disney, which launched its Disney+ service in much of Western Europe just before the crisis hit and is well positioned for the tens of millions of school children now at home, will get significant benefit from the auspicious timing. Still, Netflix, which starts from a much greater base of existing subs, will likely reap the largest share of the new audience. It has the advantage of truly global reach – Disney+ is just US, Canada and those parts of the EU, while most of the other players (e.g. Comcast’s Peacock, HBO GO, CBS All-Access, Hulu and others) are playing in North America only. It also has the advantage of an extraordinarily deep archive of content and of content tuned to many international markets. The newest entrant to the ring, short-form specialist Quibi, is a wild card. We are a bit skeptical – the very name of the service, Quibi, is short for “Quick Bites”, intended to be watched on smartphones to fill in the inevitable breaks in a life on

Exh 10: US Disney+ Daily Sign Up Volume Trend for 2020

the go. Today’s circumstances put Quibi more in direct competition with long-form content than had been intended.

As production of new programming has essentially stopped in the wake of the virus, Netflix’s depth is especially important. Disney+ has a number of truly compelling programs to draw viewers in, but that content is shallow and once subs binge through the top titles, it could be a candidate for churn, perhaps adding risk to the intermediate investment horizon (Exhibit 13). Some of the others are in better shape with content on deck – HBO Go comes to mind – but none is close to Netflix in the volume of available programming. In the long run, we see a future with Netflix and Disney (including Hulu and ESPN+) as dominant video platforms, HBO Max and Amazon Prime video as viable alternatives, and everyone else battling to gain critical mass.

Google’s YouTube dominates the independently created video space and its content has flourished with contributions from sequestered celebrities and other creators. Exposure during this stretch of extreme isolation may make new YouTube stars and prompt known personalities to continue airing content on the platform long after the crisis. TikTok had already broken out with younger audiences, but viral videos from the platform are getting a wider footprint that could translate to strong post-pandemic momentum. Facebook’s Instagram is also getting more video play as more clips “go viral”. We expect all to be big ad share gainers as the global economy begins to heal.

Exh 11: US Box Office Revenues and Unit Tickets Sold, 2010 to 2020E

Exh 12: DIS Segment-wise Sales and Operating Income Breakdown, FY2019

Exh 13: Annual content spending hit all time high before 2020 pause – NFLX’s deep library will benefit as competition remains stalled

Social Media – If it Ain’t Social, It Ain’t Media

During crises, the role of social media is amplified. Connecting with friends and family becomes more imperative. Finding credible information quickly can be critical. Sharing human narratives can be uplifting. Despite the handwringing over privacy, bias and fake news, the big social media franchises fill critical roles that are not easily filled without them (Exhibit 14).

Obviously, engagement on Facebook (and its sub-brands Instagram and WhatsApp), Twitter, Snap, Pinterest and Discord is up big (Exhibit 15). All of these platforms are seeing big bumps in regular users and in the time that users spend on their services. We expect that most of this surge of users will stay with the services, and even as the minutes of daily use subside once everyone heads back to work or school, engagement will be on a stronger trajectory that it had been prior to the contagion. This will strengthen their positions as the ad market comes back and open up new opportunities for other revenue generating businesses – e.g. e-commerce, financial services, etc.

The rise of Zoom as a consumer platform is also interesting. Originally designed for ad hoc business video conferences, the service has suddenly become the preferred platform for virtual meetups amongst friends and families. There is an opportunity for Zoom to extend this into a more full-featured consumer platform. Similarly, the group video hangout app House Party, which allows groups to set up always-available chat

Exh 14: Time Spent in Gaming and Non-Gaming Apps is Up 20% in 1Q20

Exh 15: Instagram is seeing substantial bump in engagement – growth should be consistent across other platforms including SNAP, TWTR, PINS, and TikTok

rooms for members to drop in and commune with whoever else from the group is on the app. This too has seen its user base explode and has interesting opportunities to extend its franchise post crisis.

Live Events – A LONG Road Back

Movie theaters were already suffering. Box office receipts have been stagnant for nearly a decade, with price hikes making up for deteriorating attendance. 2020 was already poised to be a down year, without any can’t miss blockbusters like Avengers: Endgame or Star Wars: The Rise of Skywalker to hold up the tent. Movie studios have already begun to experiment with shortening the windows between theatrical release and the various types of home viewing. This will continue, with more films going straight on streaming platforms. In the future, “going to the movies” may be a special event rather than a common experience, with only the biggest blockbusters reserved for theatrical distribution. Studios not affiliated with a winning streaming platform will end up selling to Netflix, Amazon and HBO, whether they like it or not.

Theme parks are a tentpole in Disney’s franchise content driven strategy and a big part of Comcast’s NBCUniversal plans as well. Unfortunately, venues like these, with long lines snaking through confined spaces and visitors converging from all over the world may be amongst the last to re-open and even when they do, fears of subsequent waves of infection could badly dampen enthusiasm. The same may be true for live theater and concerts, where social distancing is essentially impossible. Sports may return as a TV-only experience with players competing without fans in attendance. It is not clear that the resulting product will retain all of the appeal of the traditional viewing experience. For these businesses, it may be a multi-year road back to the previous normal.

Advertising – Digital Will Win … BIG!

For the moment, advertising spending is down and down hard. This affects every business dependent on ad revenues, but particularly those whose ability to reach consumers has been compromised by the crisis. This means outdoor displays. This means radio, which depends on commuters for much of its audience. It probably also means print advertising, which will see already dwindling newsstand sales dwindle to nearly nothing. TV advertising, without sports programming as a reliable magnet for ad sales, may lose some share of the remaining ad spending despite the 18% MoM jump in ratings and this could get worse as the programming shifts ever more toward re-runs.

As ad spending rebounds, and in previous recessions it has seen early and robust recoveries, campaign priorities will be reconsidered. The 2008 financial crisis capped a three-year plunge in newspaper ad revenues from which the industry has never recovered (Exhibit 16). This time we think the big casualty could be linear TV advertising. While viewership is up during social isolation, TV ratings have been unequivocally poor, even according to Nielsen’s biased ratings methodology, for more than half a decade. Despite dwindling audiences, network ad revenues have staid relatively stable, as price increases and greater ad density mostly made up the gap. We believe those levers are no longer available, and when Americans begin to return to work and school having established a much greater familiarity with the programming

Exh 16: US Newspaper ad-sales never recovered from the 2008 crisis

Exh 17: US TV ad revenues will continue to decline as production is halted

Exh 18: Digital ad sales could see growth pull-back in 2020, but shift from traditional to digital should accelerate post-pandemic

available on streaming platforms, we believe linear TV will not participate proportionately in the advertising recovery. Expect TV ad sales to fall from about 30% of measured media spending to 25% or less and to establish a declining trajectory (Exhibit 17). The other traditional components of “measured media” – radio, magazines, newspapers and outdoor – will continue their longstanding slide.

In contrast, we expect digital advertising – on video streaming, on social media, in e-commerce, via gaming, and other online activities – to take up all of the slack. The leading digital ad platforms – Google and Facebook – have unrivaled reach, deep engagement, precise targeting, and accurate ad effectiveness tracking, all enhanced by the consumer changes wrought by the crisis. Smaller platforms, like Twitter, Snap, and Pinterest, offering some of the same benefits and, often, superior access to coveted demographics should also emerge as much more attractive options for future campaigns. For consumer products, Amazon, with its ability to drive sales on its e-commerce platform, will also be a share gainer. Video game platforms, like Amazon’s Twitch, Google’s YouTube Gaming, and Microsoft’s Mixer, will get new attention from advertisers and other parts of the gaming ecosystem – social platforms like Discord, game distribution services like Steam, and game publishers (through various models, such as in-game promotions or freemium monetization) – will grow their place in the ad market too (Exhibit 18).

We note that the addressable market for digital advertising is likely 2x or more the “measured media advertising” yardstick preferred by industry analysts (The End of TV: Media Strains to Adapt to Streaming Era). Other marketing and promotion expenditures outweigh spending on traditional media ads but are

Exh 19: Inherent Advantages of Digital Ad Platforms Will Help Buyers Save Money

certainly addressable by digital platforms. For example, spending on Yellow Pages directory ads was never included in measured media but was a $45B market at the turn of the millennium that was subsequently laid to waste by Google Search. Similarly, direct mail and catalogs have been upended by email, other messaging and ecommerce platforms. We see a long runway in front of the digital ad market (Exhibit 19).

Where We’re Going, We Need Roads

Digital media may not need roads, but it certainly needs infrastructure. As the new media landscape evolves, with gaming taking a surprising lead, with streaming video displacing movies and TV, and with social media dominating consumer communications and the distribution of information, hyperscale datacenters and robust networks are that infrastructure, one shared by enterprise IT operations swamped by an explosion of employees working from home (Exhibit 20).

Exh 20: Media Infrastructure Will Win from the Surprise Growth in Consumption

The giant public datacenters run by the likes of Amazon Web Services, Microsoft Azure, and Google Cloud Platform run in parallel to the similarly giant datacenters dedicated to these companies’ internal franchise services. Facebook, without a commercial hosting business but with huge and extremely demanding internal franchises is also a massive datacenter operator. Many major consumer platforms, such as Snap and Netflix, rely on public cloud partners for the bulk of their datacenter needs, and many others, like Apple, split their workloads between public and private datacenters. A few others, such as Twitter, prefer to operate their own infrastructure for performance reasons despite lacking scale. All of these datacenters are being taxed by current demand.

Expect a capital spending boom. Orders for processors from Intel, AMD, Nvidia, and Xilinx, networking chips from Broadcom, Marvell, and Mellanox (to be acquired by Nvidia), memory from Hynix, Micron, and others, and disc drives from Seagate and Western Digital will be much higher than forecast. While some of these companies may see their boon offset by corresponding weakness in smartphones and other consumer electronics products, much of this is investible. Beyond the hyperscale datacenter, we also see content delivery networks (CDNs), which provide supplemental processing and storage from small datacenters situated as close as possible to high usage geographies, as likely to gain from this crisis. The top names here are AKAM, NET and FSLY.

Exh 21: Snapshot of Financial Metrics for Winners from Digital Media Explosion

Our Best Picks

While many companies may benefit from this unprecedented stretch of global self-isolation, we some as some as particularly good investments. We have broken recommendations into 4 categories (Exhibit 19):

  1. Gaming – Microsoft, Nintendo, Activision Blizzard, and The Stars Group
  2. Streaming – Netflix, Alphabet, and Amazon
  3. Social Media – Facebook, Twitter, Pinterest and Snap
  4. Infrastructure – Nvidia, AMD, Seagate and Fastly

We have avoided companies whose benefit from this period of social distancing would be offset by exposure to businesses hurt by the same phenomenon – e.g. Disney, Apple, Xilinx, etc. (Exhibit 21). We have also made explicit choices amongst businesses with similar profiles based on our perception of upside vs. current market expectations. We note that most published consensus estimates contain many forecasts made prior to the current crisis. Actual market expectations likely diverge significantly from the simple median taken from published research.

Exh 22: Summary of Winners for Digital Media in the Pandemic Environment

 

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