After a year in which every corner of society and every market sector was shaken by the coronavirus pandemic, analysts and investors are looking beyond 2020. For a glimpse of what’s ahead on four key growth themes, Client Focus asked four lead William Blair analysts to discuss the biggest factors likely to drive their sectors in the coming year. In December interviews, Alaina Anderson reviewed renewable energy/climate, Nick Heymann infrastructure, Ryan Daniels healthcare, and Bhavan Suri technology. COVID-19 and the results of the November U.S. election remain key factors going forward. Here’s what they said:
Renewable Energy Surge Continues
The renewable energy industry has been booming over the last decade, not only as a source of energy, but also jobs. Wind and solar energy are the big drivers — the fastest-growing sources of electricity and in many cases the cheapest. That trend is set to accelerate in the next four years. The Biden administration fully supports green energy as an overall economic engine while recommitting to cuts in CO2 emissions, marked by an immediate return to the 2015 Paris Climate Accord. The pace of this green push is what all the players in the renewable and fossil fuel energy sectors will be watching in 2021 and beyond.
During his presidential campaign, Biden detailed a “green plan” calling for $2 trillion in spending over the next four years to boost energy efficiency of buildings, build green infrastructure and manufacturing, and boost development of renewable energy such as offshore wind and solar energy.
We are looking at renewable energy—which accounts for 18% of U.S. electricity generation, versus coal at 23%—to pass coal by 2025. Additionally, the International Energy Agency (IEA) is estimating wind and solar surpassing coal and natural gas as sources of global energy by 2025. But that pace could quicken given the Biden plan that calls for U.S. renewables to overtake coal by early 2023.
The magnitude of a $2 trillion spend on renewables would be immense. Ten years ago we talked about installed capacity in terms of megawatts. Four years ago we described it in terms of gigawatts (1,000 megawatts). Now we are talking about it in terms of terawatts (1,000 gigawatts).
Signs of the clean energy revolution already hit a milestone in the fall of 2020 when NextEra Energy, the largest U.S. renewable energy company, surpassed Exxon in market capitalization. Even though NextEra has since dropped back behind Exxon the move earlier this year was a clear indication of the extreme optimism on Wall Street around the clean energy sector.
Another is the higher cost of capital fossil-fuel companies are facing today. Many financial institutions and banks have implemented more stringent lending policies or eliminated lending for fossil fuel projects, reflecting the risk of that business.
Green Renewable Energy Could Be Next Source of Long-Term Growth for Industrials
It is never easy to pass a major infrastructure program as witnessed by the Trump administration. But in 2021 all eyes will be focused on Biden’s Build Back Better push touted during the campaign for major sustainable energy and climate change spending targeted to occur over the next four years (perhaps 2022-2025).
His plan calls for improvements in transportation, roads, buildings, rail, and broadband, to cite a few of the initiatives. But much of the spending, a proposed $2 trillion, will be tied to building a modern, sustainable renewable power infrastructure to accelerate the shift to a clean energy future. That includes retrofitting old buildings to be more energy efficient, ideally shifting from fossil to “green” hydrogen energy and modernizing the U.S. power grid to accommodate bi-directional energy transmission and distribution. Tax reform will be a big focus early in the new administration to help fund this multitrillion-dollar plan. Without a majority in both the Senate and House, however, the scope of legislative reform to fund green sustainable energy to combat climate change could be more modest.
Still, there is a growing belief that there needs to be a significant change in U.S. environmental, energy and climate legislation that encourages an accelerated pace to lowering carbon emissions. One big way to reach that goal is changing how we generate energy.
Already, wind and solar farms from the East Coast to Wyoming produce more renewable energy than can be used locally. But we lack the battery capacity to temporarily store the surge in ultra-low-cost, non-continuous power generation. There’s just not enough lithium and cobalt available to meet the demand. New materials and technologies are pushing ahead to develop cost-effective alternatives.
Hydrogen—long a pipe dream for large-scale application—is emerging as a potentially viable alternative. One innovation to monitor is new lower-cost “electrolyzer” technology that produces hydrogen cleanly and cheaply from H20. It has caught the attention of many companies—Cummins, GE, Emerson Electric, Airbus SE, Kia, and the list goes on—with several big hydrogen initiatives underway.
We believe the vast majority of industrial companies that manufacture products using, regulating, generating, or distributing electricity as well as manufacturers of products that use fossil energy to operate will be affected by the conversion to the renewable energy and “green” hydrogen economy. By far, the biggest changes are seen coming in the utility and fossil powered transportation sectors as the prevalence of green renewable energy rises at an accelerating pace.
COVID-19 to Remain a Key Focus of Healthcare Sector
In 2021, the healthcare sector will continue to be driven by a variety of factors surrounding COVID-19.
The main focus for investors early in the year likely will be policies, procedures, and funding mechanisms to continue combating the pandemic. These range from another stimulus package for states and healthcare providers, to how the government can assist in the manufacturing and rollout of COVID-19 testing capabilities and, eventually, vaccines. Healthcare providers should benefit as volumes return to more normalized levels, while payers could see an uptick in medical expenses as patients return for routine health needs and postponed care.
Moreover, the Supreme Court’s review of the latest challenges to end the Affordable Care Act (ACA) has been a widely followed healthcare event. However, based on oral arguments heard on November 10 it appears the ACA will survive. A Supreme Court decision is expected by the summer of 2021. In 2019, 22 million people had health insurance through the act, according to the Congressional Budget Office.
As long as the ACA is upheld by the Supreme Court, we expect the Biden administration to build on the ACA to expand access to healthcare insurance coverage. Biden intends to offer Americans a "public option," where they can choose to either maintain their private insurance or buy into the Medicare program. This will provide a new insurance option for individuals not eligible for Medicaid due to high income or residence in the dozen states that did not expand Medicaid in the initial ACA rollout in 2010. Biden also wants to boost subsidies for individuals buying coverage through ACA marketplaces so that no family will need to spend more than 8.5% of its earnings on healthcare coverage.
From an industry perspective, the current bellwethers are likely to maintain their competitive positions and growth outlook as any pending changes under the Biden administration should be modest—especially given a divided Congress that is unlikely to enact any major legislative changes that would affect the U.S. healthcare marketplace.
That said, we do see several healthcare subsectors as emerging areas of growth and investor focus. These include remote patient monitoring, telehealth, digital patient engagement solutions, home healthcare, advanced primary care models, and big data and analytics. All are expected to play a much more prominent role in the future of healthcare—with the potential to lower costs, improve care, and increase patient satisfaction. Many of these technologies were already experiencing accelerated adoption in recent years, but COVID-19 brought them into the mainstream of care. We believe the marketplace is unlikely to reverse these more consumer-centric, lower-cost advances going forward.
Coronavirus Pandemic Continues to Transform Tech Sector
Looking beyond 2020, the pandemic will continue to serve as a long-term tailwind for the software universe.
The pandemic has already altered the structure of work as we know it—more digital connections, more online services, more automation. But while COVID-19 has been a once-in-a-lifetime event for society, the challenges it has brought for corporations are not. The innovation challenge has just intensified.
The biggest hurdle for companies has been the massive shift to a mobile workforce. The reality is that many organizations even today do not have the software and cloud computing capabilities to handle a mostly mobile workforce. Though a shift to cloud computing and SaaS (software as a service) solutions has steadily increased over the past 5 to 10 years, the pandemic accelerated the timeline for companies that had not yet adopted these services. In today’s distributed work environment, companies still using legacy systems are struggling to handle the mass migration to remote work. So cloud and SaaS providers will continue to see huge demand in 2021.
Moreover, the success (or not) of 2020’s forced migration to remote work is now informing long-term budget and business strategy decisions in corporate boardrooms. The idea that we can be anywhere, anytime will be a huge driver of growth for software companies for a long, long time.
Innovation is erasing distance. Take DocuSign, whose e-signature technology allows you to sign legal documents digitally for mortgages, school enrollment, or construction contracts. Or Low-code/No-code and Appian, which design and develop software solutions so that individuals without IT experience can build their own workflows.
Another big area of innovation to watch in 2021 will be communications. Online technologies combining speaking, writing, audio-recording or videotaping will accelerate. We are going to be staying home more. But we’re going to communicate, collaborate differently. Convergence will be important and driven by need. Just look at how the world—not just companies—embraced user-friendly systems like Zoom since the pandemic.
When the pandemic subsides, people will go back into the office—but maybe just two or three days a week. Lessons have been learned, costs measured, digital bridges built. Society’s digital transformation will move forward and business will continue to invest in SaaS technology.