COVID-19 entrepreneurship: the crisis plan
To say that we are facing an unusual situation would undermine the magnitude of the phenomenon that conquered every corner of the planet.
Economic crises have happened before and will happen again, but it is for the first time in the last hundred years that the enemy is invisible and affects the global economy as a whole – without discriminating between business sectors, levels of economic-social development, or geographical positioning.
We are facing fear, anxiety, panic, and, like in any extreme situation, the very essence of our being is put to the test: fight or flight? We can relate to this axiom on a personal level, where each of us manages their stress responses as good as they can, and also on a business level, where the actions of the companies are modeled by the spirit of the entrepreneur behind them.
I’m fully confident that survival and well-being are reserved not only for the most prepared but also for the most adaptable individual.
Current state of affairs
In just three weeks, no less than 16 million Americans have filed for unemployment, according to the New York Times. The signal is clear for entrepreneurs around the world, even if not all countries provide the necessary statistics: the economic crisis is here for sure, with decline estimates varying from a few percentage points to as much as 15-20%, according to expert estimates.
Based on reports of newly registered unemployment claims in the US, some pundits have been anxiously stating that the $2 trillion (thousands of billions) state aid measures announced by Donald Trump will not have the expected effect. History will show us who’s right and who’s wrong.But, as a starting point, this incentive package has provided a period of relative stability for the stock exchanges, and in some cases, even a slight recovery for indices.
The bailout package devised by the FED (and most governments/central banks of the world) will not help the economy stay afloat forever. Fortunately, this is not the intended response. Its purpose is to encourage individuals, entrepreneurs, businesses to wake up from their slumber and fight for survival. Without any supportive reactions from the private sector, it won’t matter how much money the central banks print; the economy will still collapse eventually.
That is why it is absolutely essential that the economy – which is not an entity with a volatile form, but structured on businesses of all levels – will realize that the only desired direction is upwards.
Ever since I took my first steps in entrepreneurship, I focused on building a healthy, sustainable, anabolic type of business that can be developed and scaled, regardless of how the wind of change blows – nationally, regionally, and globally.
A critical factor in this philosophy was the “work-from-home concept”, which, until a few weeks ago, was only seen as a “treat” reserved for the select few. Well, for the companies in my group, the employee activity carries on as usual, I’m even noticing an increase in productivity – with 99% of my staff working from home for over a month!
As for any top-performance analysis, the structure behind is much more important than the conclusion: I’m here now because I emphasized from the start significant investments in what I believe is the backbone of a fintech business: the IT department. Only thanks to an IT department that works flawlessly we’re able to talk about digitalization, digital transformation, cloud-businesses, increased autonomy, and increased immune response to any economic storm that may come our way.
What I did
It is not my intention to deliver a crisis-response manual or to make an exhaustive list; I just want to detail some of the decisions I already took or will be taking in the following period:
1. Specific budgeting
No containing measure or reaction in this world, no matter how revolutionary and daring, will succeed unless it’s supported by money. Cash flow is king! Analyzing, sorting, and transforming the fixed and floating cash-flows are essential processes in times of crisis.
I mentioned earlier that the IT department is the backbone of my business. I’ve set this mindset since 2018, a build-up year, and I enforced everything in 2019, not in anticipation of a crisis (which actually happened), but because this is the ideal flow for my business.
Internal communication, advanced reporting services, tracking specific KPIs, analyzing business data, building a complete ecosystem that includes the entire business, cloud services, business intelligence, and the list can go on. All of these are just cogwheels which work in sync only when well-oiled by a cohesive and sound IT department. Infrastructure is key during this period of crisis. 😊
Key people now have the chance to benefit from all this and gain even more power and influence in my organization, when face-to-face communication is no longer an option. I’ve always been humble enough to surround myself with people who challenge me, people with a strong personality, and decision-making power – now is their time to shine and prove to me, once again, that the power of my business is in their hands.
4. Flows and procedures
Setting goals and pursuing them is no longer a novelty for any business of high standards. I have implemented a fixed schedule for evaluation, preparation, and goal-setting meetings that can be easily tracked. Every Monday, I surround myself (virtually, for now) with my top management to prepare and start-off the week, and each Friday finds us in a video session to conclude and evaluate the past five days of activity.
Thanks to the IT systems mentioned before, it’s elementary for me to track the group’s reporting activity, starting from macro to micro objectives – where the situation requires it.
6. Financial motivation
I have built a meritocratic culture around me; with one hand, I reward those who perform well, and with the other, I track, identify, and analyze the environments and the people who aren’t at their best yet. I believe in the people around me, which is why I invest the time and resources needed to listen and help those who need a boost – experience has shown me that some diamonds need to be polished more before they start shining.
7. Preparing the return to the office
In small but firm steps, our activity will be returning to normal. I have invested, and I’ll still be investing in the safety of my colleagues: I’ve acquired medical and protective equipment (masks, gloves, sanitizers…), we’re prepared to install a disinfection tunnel, all in order to be able to gradually start resuming our activity. I forecast that in a few months – although nothing will be the same in the post-Coronavirus era – the activity of my group will be resumed.
A crisis is an opportunity for reflection, development, and adaptation. There are still many things to improve; there are threats that have not yet made their presence felt, but, based on the above organizational structure, I am fully confident that the Coronavirus crisis era will be a huge opportunity for Key Way Group and myself. We have the right tools and attitude to take this chance and use it to evolve and progress!
After a mixed Q1 earnings performance (see my previous blog post) in which I predicted and, eventually, saw most economy sectors under-performing up to the brink of bankruptcy (with famous „victims” such as Hertz International or LATAM Airlines), and the sheer rise to stardom of „work-from-home” sweethearts Zoom, Microsoft Teams, Slack, it’s easy to say that the Corona pandemic took a carefully selected toll on the business world.
As previously predicted, the superstars of Q1 have been the technology behemoths, starting with the FAANG group (Facebook, Amazon, Apple, Netflix, and Alphabet) and continuing with the fresh princes: Zoom, Slack and other collaborative tech companies.
I already mentioned in my previous analysis that, even though Q1 has been very good for business for the companies above, Q2 will not be so generous. More and more people find themselves out of a job, companies close or at least reduce volume, investment budgets disappear, research and development go bust, and consumers become more and more selective with their cash.
Macroeconomic data, in the US and elsewhere, fully supports the statement above and paints a very grim picture: US unemployment close to 25% (that’s more than 40 million people having no other choice but to apply for government help), a GDP drawdown of 34% according to analysts at Goldman Sachs.
It’s a dire future they predict, and it could get nasty for most S&P members. According to a research paper from factset.com, for Q2 2020, the estimated earnings decline for the S&P500 is 43.4%.
If 43.4% is the actual decline for the quarter, it will mark the most significant year-on-year decline in earnings reported by the index since Q42008 (-69.1%). On a per-share basis, estimated earnings for the second quarter have decreased by 35.9% since March 31st.
*image source: factset.com
I see most, if not all, market sectors dropping in terms of revenue, earnings per share, target prices, P/E ratios. In part, due to the global exposure most of them have which brings more considerable influence, and from Covid-19 induced crisis but also because there’s no winner when everybody’s worrying for tomorrow.
In an interconnected global economy, there can no longer be a superhero company floating above all else; we’re all in the same predicament.
Murdered by numbers
Don’t let yourselves be fooled by the YTD performance of US indices:
- NASDAQ – 9814 points ~13% YTD
- S&P – 3193 points ~2% YTD
- DJIA – 27110 points ~-2% YTD
*image source: Yahoo Finance
By looking at the figures above, one might think the markets are all but immune to the effects of the pandemic over the real economy. It’s my firm opinion that the fairytale in which the markets are living right now is soon to end, more precisely, with the Q2 earnings releases.
In terms of business sectors, I prefer to focus on a 4-pillar aggregate:
- Cyber-security companies
- Collaboration & conferencing products
- FAANG companies
- Automation companies
Here’s my vision over these diverse and peculiar sectors and how I see the performance on Q2 earnings:
*forecasts from money.cnn.com & TipRanks
This is not a place for the giving or receiving of financial advice, advice concerning investment decisions or tax or legal advice. This is being based on personal opinion and experience and it should not be considered professional financial investment advice.
Take into consideration that most target prices from the table above are on the optimistic side as pundits, experts, and analysts are always considering the “market sentiment” in their thought process, and the overall feeling of the market right now is one of “immunity” to the effects of the pandemic.
Delving deeper into the core of the problem, I say the economy is not reflected in the equity markets, and there’s been a division between market sentiment and market performance.
In times of uncertainty and crisis, people and markets alike return to the basics, which, in capital markets, boils down to coming back to the fundamentals. Caution is the word of the times, and this caution, combined with the weaker financial performances of global equities, will push the markets lower - the general decrease in prices will come.
I've always put my money where my mouth is; this is why I'm all-in shorting the markets until the end of the year. When life gives you lemons, you make lemonade. When, in turn, it gives you a discount, you buy full-on, pedal to the metal. Because it's smarter to ride the wave and not go against the giants of the global economy: USA, I guess 😊 & China
Sit tight, prepare yourselves and your investment portfolios for big moves, and stay calm – these are the steps I’m taking and have proven to be the right ones in 2008 and any other crisis before and after.
Wall Street was preparing itself for a terrible earnings season.
It’s not all bad news
The negative influence of the Covid-19 pandemic has been deemed to be anything between dire and desperate. And, for most, this already is, and will surely be, the case.
The exceptions are, by proper definition, exceptional. I'm talking by bigger-than-Earth companies, enterprises with revenues more massive than most countries' GDPs, behemoths in their own right: most, if not all, from the tech sector: Microsoft, Alphabet, Amazon, Facebook, Apple.
For them, the lockdown, the social distancing, the increased online presence, the overall feeling of insecurity, fear, anxiety, and maybe even boredom is yet another reason for people to use their services and, all in all, for them to generate more revenues from their core, and secondary, and tertiary businesses.
Tech sector breaking records
It might be Wall Street's worst-kept secret that the tech sector is, and has been for at least the last decade, on everybody's lips, in everybody's mind and, sooner rather than later, in everybody's investment portfolio. And by everybody, I mean all social classes, all levels of interest towards capital markets: from your hairdresser to Warren Buffett's humongous investment conglomerate.
The reason for this is simple: if you'd have invested $1,000 in Google stock ten years ago, you would've yielded a hefty 475% return, 590% for Microsoft, 1,700% for Amazon, 1,000% for Apple, and 550% for Facebook.
image source: cnbc.com
They're all rocket ships on their way to trillion-dollar market capitalizations (the Trillion Dollar club already includes Apple, Microsoft, Amazon, and Alphabet). And there's not much that can stop them. At least not yet. Not in the first quarter, not by the Coronavirus, not even the containment measures.
Their earnings for the first quarter looked better than expected, and, for sure, better than those from any other market sector, be it retail, banking, automotive, travel & tourism, or commerce.
*special mention for Tesla
Its stock price marked an astounding 3,500% return on the last decade. Although it’s seen a slight decline in the past months, it’s still reaching for higher highs and will, according to most market analysts, reach and top the historical max value of $917/stock.
Long term forecasts for TSLA stock price are close to $1,100, according to CNNMoney, which means an additional 35% ROI from current stock prices.
I’ve included Tesla here because the behavior of the company, and implicitly, of the stock, mimics those of tech companies, not of automakers. They’re constantly innovating in terms of business, budgeting, marketing and financial positioning and I see them being one of the top performers of this decade, as well.
image source: cnbc.com
*special mention for Zoom
What else is there to say about Zoom apart from the fact that, taking full advantage of the unconventional ways of doing business brought up by the pandemic, it exceeded 300 million daily meeting participants, up from last December's total of 10 million. That’s a remarkable 3000% jump.
Analysts at seekingalpha recommend Zoom as being a “buy and hold” stock for the long run. CNNMoney see Zoom’s stock reaching $200 – a potential increase of 20% from present day prices.
EARTH 2.0 – the mandatory condition to digitalize businesses and embrace and prepare for the future. Today. All companies below are prime exponents for this business model, and it paid beautifully until now. Just as the Industrial Revolution rearranged the balance of powers almost 2 centuries ago, we are witnessing history in the making with the current the Technological Revolution:
- Alphabet (mother company of Google): revenue of $41.2 Billion (13% higher than the previous year)
- Facebook: revenue of $17.7 Billion (18% higher than the past year)
- Amazon: almost $76 Billion in revenue deriving from an 18% increase in international sales
- Microsoft: revenue of over $35 Billion, extremely positive outlook on the medium and long term
*Tesla: not much in terms of revenue, but a substantial ascending stock trend (it rose more than 200% in 2019)
*Zoom: 12% share increase after revenue more than doubled in the quarter
A stubborn, poorly adapted, conventional business model is, and has always been a recipe for disaster. On all accounts, Microsoft should have been on the losing side of things, if it weren’t for Satya Nadella, the CEO who brought openness and collaboration to what is once was a sinking ship.
Comparing well-established enterprises with the tech cousins from above:
- JP Morgan – profits dove 69%
- Bank of America – profits plummeted 45%
- McDonald's – earnings fell 17%
- Exxon – 7% stock decrease on account of weak earnings
- Boeing - $649 million loss, 10% workforce dismissed, revenue down 26%
- Ford - $632 million loss, 15% slid in revenue, shares dropped 42% this year
- General Motors – 87% decrease in income compared to Q1 2019, 6.2% decline in revenue
The gap between winners and losers grows more profound for now.
It's my undivided opinion that all four major tech players that right now are laughing all the way to the bank will have to turn their smiles into frowns once Q2 earnings are released. They took advantage until now from the increase in the cloud business and the work-from-home movement.
But the economy forgives and forgets no one – in the USA alone, more than 30 million people filed for unemployment benefits in the last seven weeks, and the future does not look too rosy for the job sector.
No matter how much money the Fed might helicopter-throw unto the economy, the consumers are scared, cautious with their finances, and, in some cases, even hungry.
In these circumstances I see the Q1 earnings success for the tech giants is a temporary victory. I firmly believe they will be caught from behind by the huge wave that already smashed retail, banking, services, commerce, oil, entertainment, or travel.
The future is grim
Q2 earnings will be an eye-opener for all market optimists across the board.
Goldman Sachs expects a US GDP contraction of 34%, unemployment soaring to 15% - no happy-end is in sight.
US retailers are stopping payment to hundreds of thousands of workers in a desperate struggle to cope with the slump in demand, the four rounds of economic stimulus from the Fed seem to make little to no difference until now.
On the long run, in an inter-connected global economy, everybody's in the same boat: decrease in consumption and demand from commerce and retail brings lower ad revenue for Google, which in turn brings down the cloud business revenues, which in turn influences the hardware demand, which in turn affects producers…and so on. The cycle cannot be broken without every integral part being affected.
Turn coal into diamonds
Provided the virus is ephemeral, maybe even more or less contained in Q2, the global economy might start to pick-up and rise from its ashes in the second half of 2020.
As always, being in close touch with the state of affairs, being up to date with the news, keeping your head clear and thinking straight on how to turn this fallout into an opportunity is the best advice I can give you.
The harder the containment measures strike, the bigger the economic shock, the larger the recession that will entail, and the more considerable the investing opportunity!
It's challenging to keep your cool now, but I'm confident that those who adapt, those who look for alternative investment means (be it art or safe-haven assets such as gold or platinum or even fintech companies) will enjoy one hell of a ride.
I’ve split the final chapter into two categories: my personal vision and my professional endeavor.
I’m an investor myself and I see this crisis as an opportunity to short the market on businesses that have not yet adapted to the new world and, in order to practice what I preach, buy Tech Companies (F.A.N.G.) for the long run.
Protect my businesses and my employees; the measures I already took (work-from-home for 99% of my workforce, consolidation measures for capital flow, redirecting of investment flows, budget reframing, alternative investment areas, enforcing my business' technology core) will continue to prove successful and inspired.
Even though we’re constantly expanding, having more than 250 employees all over the world, I want to continue behaving and acting just as a start-up; I see in this the right way to consolidate our position, and conquer new markets and alternate areas of investments.