There is growing evidence that many important secular trends which accelerated during COVID have a life in a post-vaccine world. Let’s start with the narrative many market participants were pushing during the recent growth stock pullback, namely that any company which benefited from COVID (e.g., work from home beneficiaries) would necessarily be hurt when the economy re-opened and employees started going back to work. In this narrative—which we never agreed with—the COVID boost was just a one-time bump in growth with a hangover to come. This narrative appears to be unraveling, as investors begin to realize that many secular trends will continue for multiple years to come.
What, then, is really happening?
Rather than being a one-time bump in growth from COVID, what many secular trends actually experienced is what we refer to as the kick-start effect—spurring long-term adoption. The definition of kick-start, according to the Merriam-Webster’s dictionary, is “to cause something to start quickly” or “to give new energy to something.” These descriptions are a far better fit with reality than the one-time bump narrative, as many secular trends—such as the shift to e-commerce, the shift to cloud computing and software-as-a-service (SaaS), and the shift to digital streaming services—experienced “new energy” which will spur continued growth and adoption on a global basis. And other secular trends that are even earlier in adoption, such as eSignatures, experienced the “cause something to start quickly” dynamic. We believe these trends are still early in their lifecycles, not at the end.
Let’s touch on a handful of examples to bring this kick-start effect to life and provide evidence for it.
In a post-vaccine world, Zoom is benefiting from the rise of “hybrid work” following and in addition to the boost it received during COVID. In this new operating model, work is being redefined as a hybrid of the old model (five days at work) to a combination of spending a few days in the office and working from home part of the time. This allows for greater flexibility around each employee’s commute and the death of the rigid 9-to-5 job. What enables hybrid work? The same cloud-based applications and online collaboration tools we relied on during COVID!
Zoom is a great example of the kick-start effect as it relates to the trend toward hybrid work. Despite the re-opening, users aren’t abandoning Zoom; rather, companies are doubling down on it, expanding it to more and more users and use cases. In the most recent quarter, Zoom reported 191% revenue growth and saw its Zoom Phone service grow to 1.5 million seats from 0.5 million seats last year. CEO Eric Yuan said it best: “We are energized to help lead the evolution to hybrid work that allows greater flexibility, productivity, and happiness to both in-person and virtual connections.”
HubSpot is another great kick-start effect example. During COVID, companies had no choice but to market digitally in the absence of face-to-face or traditional interactions. For many businesses, it became a crash course on how to build out a digital marketing presence. But, again, this was not a short-term, one-time bump in adoption. Building out an advanced digital marketing effort is a multi-year effort, and companies of all sizes—from local small businesses to large enterprises around the world—are embracing digital marketing and related customer engagement tools. Like Zoom, HubSpot is seeing last year’s boost to its business extend into this year—the kick-start effect—as total revenues increased 41% year over year in calendar first quarter 2021. As co-founder and CTO Dharmesh Shah stated, “Both revenue and customer growth accelerated from Q4 [2020]. This has been driven in part by a significant demand for digital transformation. More and more companies are shifting to a digitally powered, if not digital-first, customer experience.”
DocuSign is another great example of the kick-start effect and a secular trend that is very, very early in adoption. The company is benefiting from an evolutionary shift from paper-based contracts to digital contracts signed with eSignatures. Perhaps the best way to describe this trend is that we are shifting to “DocuSigning” documents. DocuSign has become a verb as its platform has evolved into the gold standard for eSignatures. So, as we enter 2021, is DocuSign succumbing to the one-time bump effect or the kick-start effect? You guessed it—it’s the latter. DocuSign delivered 58% growth in revenues year over year in the first quarter of 2021. As best stated by CEO Dan Springer, “We’ve increasingly become the way people agree in this emerging anywhere economy—and that’s not only helping organizations continue operations during the pandemic, but helping them realize new and more efficient ways of doing business in the future…We are still in the early days.”
Accelerated Secular Trends Still Point the Way Forward
The bottom-line: a post-vaccine world does not mark the end of key secular trends. We do not believe that a re-opening of the economy will cause a reversal of the direction of key secular trends; nor do we believe that it will slow adoption of important innovations. A general economic recovery can be positive for both cyclical and secular growth industries. By staying focused on secular growers, investors can benefit from both the economic recovery and years of growth beyond the initial rebound.
