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How the Technochasm Became an Abyss

We are seeing firsthand just how essential technological prowess has become for most companies

On the winning side of the “Technochasm” we find thriving technology-powered businesses and professions.

technochasm
Source: Shutterstock

On the other side we find everything else.

And the Covid-19 pandemic has driven a massive wedge between these two sides to force them farther apart than they’ve ever been.

The chart below tells the tale. The S&P 500 Software Index recently hit a new all-time high, while U.S. employment plummeted from an all-time high to a 24-year low.

Chart comparing S&P Software Index to U.S. employment
Source: Charts by InvestorPlace

And the true employment picture is even uglier than the one above. As the chart below shows, the percentage of the U.S. labor force that is currently employed has tumbled to its lowest level in at least 70 years.

Chart of U.S. employment as a percent of the total workforce over time
Source: Charts by InvestorPlace

Generally speaking, the 42 million newly unemployed Americans possess no techno-centric safety net. They cannot simply convert their bartending job, for example, into telecommute mode and serve virtual drinks until cyber-closing time.

Once the Covid-19 epidemic struck, nearly every industry or profession that involved direct human interaction found itself face to face with a shutdown order … and zero revenues.

From hairstylists to dentists, from cable installers to bowling coaches, the inability to transition from the normal, physical mode of business to a virtual mode caused a complete loss of livelihood.

Meanwhile, every individual who could shift to some sort of work-from-home lifestyle did so. Obviously, the types of businesses and professions that can operate out of a home office tend to be more technology-based than those that can’t.

Our economy will always feature a wide array of enterprises – some of which require intense human interaction, and some of which require no interaction whatsoever.

A restaurant will always be a restaurant. It can’t ever be a video game. A music festival will always be a music festival – never an iPhone app.

In other words, the Technochasm does not imply that any one profession or industry is better than another.

It merely highlights the vulnerability of non-tech-based professions and industries, relative to their tech-enabled counterparts.

The Technology Advantage and the Technochasm

As a group, low-tech professions and industries are not as adaptable to economic shocks. Additionally, they cannot establish and fortify their competitive advantages as quickly or efficiently as their high-tech counterparts.

A low-tech company operating in the midst of rapid technologic innovation is like a human being swimming in the open ocean.

No matter how well that human might be able to muscle through the giant swells, a cruise ship can do it better, faster, and more securely – while also serving up chardonnay and sushi.

The “cruise ships” of this metaphor are the companies that either develop new technologies or effectively integrate those technologies into their existing processes.

But integrating new technology is hard work, especially if you’re a big, fat, happy U.S. corporation that has enjoyed decades of success. Often, the stewards of such corporations fail to recognize the competitive perils they face. Therefore, they fail to adapt quickly enough to save themselves.

Many great success stories later become infamous failure stories because they failed to innovate. As a result, they shuffled off into irrelevance and bankruptcy.

That ignominious list of companies would include names like:

  • Sears, Roebuck and Co. (OTCMKTS:SHLDQ) (1893-2018)
  • Eastman Kodak (NYSE:KODK) (1884-2012)
  • Neiman-Marcus (1907-2020)
  • Hertz (NYSE:HTZ) (1923-2020)
  • Pan American World Airways (1927-1991)
  • Hostess (1930-2012)
  • Polaroid (1937-2001)
  • Tower Records (1960-2004)
  • Compaq (1982-2002)
  • Blockbuster (1985-2010)

Blockbuster, the titan of home movie and video game rental services, is one of the most spectacular – and ironic – of American success-to-failure stories. At its peak in 2004, Blockbuster employed 84,300 people worldwide and operated more than 9,000 stores.

Just four years prior to this peak of prosperity, an up-and-coming company called Netflix (NASDAQ:NFLX) offered to sell itself to Blockbuster for $50 million. Then-Blockbuster CEO John Antioco dismissed Netflix as a “very small niche business” and rejected the offer.

Two decades later, Blockbuster is an extinct B-school case study in corporate hubris and managerial myopia. Netflix is a $184 billion juggernaut.

Chart comparing Blockbuster and Netflix revenues
Source: Charts by InvestorPlace

Since Blockbuster’s demise in 2010, the retailing landscape has become even more treacherous. In 2019 alone, an estimated 12,000 retail stores closed. And the tally of store closures continues growing by the day. Investment bank UBS estimates retailers will shutter another 75,000 physical stores across the United States by 2026.

And yet, even while thousands of U.S. retailing operations are pushing up daisies, a few tech-savvy retailers are growing like redwoods. And their share prices are performing even better than many of the stock market’s leading tech stocks.

Brick and Byte Retail

For example, even though the coronavirus pandemic dealt a setback to the physical retail operations of Nike (NYSE:NKE), Lowe’s (NYSE:LOW), and Lululemon Athletica (NASDAQ:LULU), the shares of all three retailers are now trading at or near all-time highs.

That’s because each of these companies has developed robust direct-to-consumer (DTC) sales channels that generated strong sales through the worst of the Covid-19 crisis.

Nike’s DTC division, Nike Direct, produced almost a third of the company’s global sales last year. And Nike expects to boost DTC sales by at least 50% over the next two years. Its stock has soared more than 15% over the last 12 months.

Lowe’s is another success story. Although the hardware retailer was late to the game, its DTC channel is now flourishing and contributing a rapidly growing percentage of the company’s overall sales.

Lowe’s stock has soared more than 30% over the last 12 months and reached a new all-time high earlier this month.

Lululemon may be the poster child of DTC know-how. It was one of the first major retailers to emphasize online sales in conjunction with a network of physical stores. The company is now reaping the rewards of that forward-looking strategy.

DTC sales account for more than one-quarter of the company’s revenue and more than one-third of its operating income. Its stock has soared more than 70% over the last year and recently reached a new all-time high.

You see, no matter how “old school” an industry might be, companies within that industry can still put themselves on the winning side of the Technochasm, simply by applying technology intelligently. The copper mining giant Freeport-McMoRan (NYSE:FCX), which I called my “Best Stock of 2020” back in December, is just one example.

No industry is more old-school than copper mining. And yet, Freeport-McMoRan has been developing a sophisticated artificial intelligence (AI) process at its Bagdad copper mine in Arizona.

This AI model uses data from sensors around the mine to “tailor” the ore processing method to each of the seven distinct types of ore that come from the Bagdad mine.

This innovation has been “a remarkable success,” Freeport CEO Richard Adkerson says. So the company is now planning to roll out this new technology across all of its operations in the Americas.

The stock has staged a nice recovery from its March lows, and I expect it to continue moving much higher over the coming months.

We are seeing firsthand just how essential technological prowess has become for most companies. The Technochasm is gaining strength, and as it sweeps through the global economy, it will continue to reward technologically savvy companies.

And it will visit destruction on those that are slow to adapt.

Regards,

Eric Fry

P.S. I’ve identified four tech companies I think you should buy right away to capture the biggest gains in the market going forward. You probably haven’t heard of a single one of these stocks… but each of them could potentially become my next “10 bagger.” In my new presentation, I’ll tell you how to find out more about them. Check it out here.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls — in good markets AND bad. How? By finding potent global megatrends… before they take off. And when it comes to bear markets, you’ll want to have his “blueprint” in hand before stocks go south. Eric does not own the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/how-the-technochasm-became-an-abyss/.

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