The Technology Sector's 2020 and What It Means for 2021

Tech has had a great year, but an important issue has emerged

The technology sector was already big prior to 2020, boasting trillion dollar companies, with Alphabet Inc. (GOOGL) joining the club in early 2020, and a healthy outlook going in. Due to the pandemic, however, the importance of the technology sector increased enormously. We'll look at tech's 2020 and what it likely means for the sector's performance in 2021.

Key Takeaways

  • The tech sector has enjoyed a strong 2020 driven by people turning to more online solutions for their work and home lives.
  • Many of the habits now being formed will carry into 2021 and beyond, contributing to long-term revenue growth for the companies that excelled during the pandemic.
  • One important thing for investors to note is the legal action being aimed at the technology sector and the implied loss of social license driving this.

The Adoption Acceleration

The pandemic had many impacts, but one of the broadest effects has been an acceleration of technology adoption at work and at home. This adoption acceleration was, of course, driven by the needs of people in lockdown and the pivot by many companies to working virtually. The tech sector received a big boost as a result, and we can reasonably expect those positive effects to linger well into 2021 and beyond. When there is a more concerted effort to get workers back in office, usage of services like Zoom Video Communications, Inc. (ZM) may drop for internal meetings and happy hours, for example, but too many people have realized that a video call can replace a costly business trip for the trend to fully reverse.

Similarly, the convenience of click and collect as well as groceries delivered to your door will become a habit for people who have grown used to the convenience – the initial public offering (IPO) surge of DoorDash, Inc. (DASH) likely owed a lot to this realization. This expansion of online shopping habits goes beyond packages from, Inc. (AMZN), with consumers now able and willing to purchase larger ticket items like furniture and cars without visiting a physical location. This increased willingness to buy larger items online helped Wayfair Inc. (W) enjoy triple-digit growth, with the company's stock sitting up over 180% on the year.

While the online retailers are in good shape overall, some of the big winners in the pandemic may not be as strongly positioned for a post-vaccine world. Peloton Interactive, Inc. (PTON) is one of the tech stocks that the market appears to be using as a test case for post-vaccine resilience. The stock cooled after the Pfizer Inc. (PFE) vaccine announcement but is heating up again as the pandemic looks to drag on well into 2021. Whether the company can translate its pandemic success into a permanent alternative to community gyms and studios remains to be seen, but it is a huge edge when the main competition is being financially devastated by lockdowns and public fear around sharing space.

Digitizing Traditionally Low-Tech Sectors

The push to go digital has been immense in traditionally low-tech sectors. The public sector, for example, has held onto physical paperwork and in-person interactions to a greater degree compared to the private sector. Now, however, we are seeing a global push to digitize government records and take workflows online. Some functions, like food or environmental inspections, will never be fully digital, but many of the more mundane aspects of the public sector like renewals, certifications, and documentation are being moved online.

The companies that benefit from this push are larger tech companies that can tender bids for more comprehensive service agreements with the public sector. Microsoft Corporation (MSFT), Oracle Corporation (OCRL), International Business Machines Corporation (IBM), Accenture plc (ACN), and Alphabet's Google are all offering large-scale services in this area.

As these companies successfully transform some of the more byzantine areas of public administration, this learning is being turned to interconnected sub-sectors of that ecosystem, including health and education. The size of this market and the nature of the longer-term contracts represents a rare area of real growth for these tech giants in the years ahead.

The Lawsuits

Speaking of tech giants, they may spend 2021 facing an issue oil and gas companies are familiar with – social license. 2020 started off a bit rough for social media firms like Facebook, Inc. (FB) as far as public relations due to a Netflix documentary called "The Social Dilemma." The documentary shined a light on how social media platforms sought to keep users scrolling and clicking to drive their revenue, and it made the message stick by personifying the platforms as experimenting on their audience.

This was followed by Congressional hearings on big tech stifling competition in July, featuring Jeff Bezos (Amazon), Sundar Pichai (Google), Mark Zuckerberg (Facebook), and Tim Cook of Apple Inc. (AAPL). Zuckerberg then appeared in front of the Senate judiciary committee in November with Jack Dorsey of Twitter, Inc. (TWTR) to answer questions around the handling of the 2020 election.

The issues being raised by all this attention are many, but a few key ones have spawned litigation that may eventually lead to heavier regulations and perhaps even antitrust action in the tech sector. The questions currently being litigated or considered for litigation include: 

  • Is Google a monopoly in search, and is it actively working with other large players to maintain dominance?
  • Is Amazon using its platform sales data to clone successful third-party sellers' products for its Basics line?
  • Is Facebook using acquisitions and its size to eliminate competition in social media platforms?
  • Are social media platforms like Facebook, Google (YouTube), and Twitter using the guise of platforms to grab ad revenue that should be going to the original content creators and publishers?
  • Are social media platforms responsible for the content being shared using their platforms, similar to how newspapers are liable for content they publish?

The answers that come out of the courts on these questions could reshape large parts of the tech sector. Given the complexity and importance of the answers, however, investors shouldn't expect too many of them to be resolved in 2021. 

The Bottom Line

Although 2020 was unpleasant for most of us, it was generally positive for the tech sector. The acceleration of tech adoption had a corresponding effect on the revenues and the business models of the companies offering that tech. The tech sector has the twin advantages of a revenue windfall and momentum going into 2021, increasing the probability that the broad sector strength will continue.

That being said, investors need to be aware that tech has a social license issue that has just started to come to the surface in 2020. In 2021 and beyond, we are going to see whether tech's future is one of unrestrained innovation and competition or whether regulation will come in to curb some of the excess.

Take the Next Step to Invest
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.