The Dow Jones just ended its worst-ever first quarter, falling over 24% in this period. The coronavirus pandemic has spread to all major economies, crippling several industries and driving stock markets to multi-year lows. The Dow Jones and S&P 500 Index are currently trading 28% and 26% below record highs, respectively, as of April 1.
Investors are sweating over the decline in portfolio value in a market that is expected to be volatile in the short term. Several tech stocks are trading below record highs, but a few have managed to outperform the coronavirus-led bear market.
Here we look at three such companies that have a sound business model to not only help them tide over the near-term weakness, but also give investors an opportunity to create massive wealth over the long term.
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A streaming giant
The COVID-19 pandemic has resulted in countrywide lockdowns and business closures all around the world. As people are spending a significant amount of time at home, the demand for streaming services has witnessed a surge in demand.
The world's largest streaming company is Netflix (NFLX -0.48%), and the stock is trading at $371.15. It lost under 4% in market cap since Feb. 19, when the broader markets peaked.
In fact, Netflix managed to crush market returns even during the great recession of 2008-2009. While Netflix was in a nascent stage then, it is now an established player with a strong balance sheet and huge market presence.
With 167 million global subscribers, Netflix is well poised to gain customers, especially in the coronavirus hit countries of Spain, Hong Kong, Italy, and South Korea. According to a Strategy Analytics report, coronavirus is expected to add 5% in global subscriptions this year. This represents an increase of 47 million subscribers in 2020.
While Netflix should benefit from an increase in subscribers, it will lower spending for the creation of original content this year due to the pandemic. All shows under production have been put on hold, and will restart once the global situation eases. Netflix was estimated to spend $17.3 billion in original content creation in 2020, according to one BMO Capital Markets analyst.
A cloud-based enterprise-facing company
Shares of Okta (OKTA 0.95%) are trading at $121, which is 15% below record highs. Okta is an enterprise-based access management and digital identity management company. The stock has created considerable wealth since its IPO back in April 2017, easily crushing broader market returns since then.
Okta continues to benefit from the increase in cyber attacks and data breaches, which has been a key driver of top-line growth. Now, as several companies are running their businesses remotely, the demand for Okta products should increase as employees remain vulnerable to digital theft.
Okta's cloud-based application provides user authentication for several software applications using a single login process. In the last quarter, Okta increased its customer base by 550, taking the total count to 7,950. A dollar retention rate of 119% also indicates that existing customers are subscribing to additional services.
Okta continues to reinvest a significant portion of its revenue toward product development, which in turn will improve customer retention and drive sales growth.
A top collaboration player
Another company that has benefited from the work from home trend is Zoom Video (ZM -0.68%). The stock is trading at $137.5 and has gained close to 35% since Feb. 19, making it one of the top performing companies in the sell-off.
It is quite possible that remote work is here to stay, long after the world is free of COVID-19, making Zoom Video a solid bet for the upcoming decade. In the fiscal year ended in January, Zoom reported sales of $622.6 million, an increase of 88% year over year. In the fourth quarter, Zoom sales rose 78% to $188.3 million, while adjusted earnings per share was up 275% at $0.15.
The company reported free cash flow of $26.6 million and ended fiscal 2020 with a cash balance of $855 million. The revenue growth was driven by stellar growth in high-paying customers. In the fourth quarter, the number of Zoom customers with an average contract value of $100,000 was up 86%.
Sure, Zoom has experienced a considerable uptick in downloads in recent times. However, the expanding total addressable market in the collaboration market makes it an ideal long-term bet for growth investors.
The verdict
Netflix, Okta, and Zoom are all growth stocks. This means they trade at a higher valuation multiple. While Netflix has a forward price to sales ratio of 6.9 , this multiple for Zoom and Okta stands at an astonishing 44.3 and 19.5, respectively.
Growth stocks tend to have a high beta, which makes them volatile, especially in a downturn. However, all three tech stocks have outperformed the current market sell-off due to an increase in demand for their products and services.
While most companies will experience a fall in top-line growth, Zoom, Netflix, and Okta should continue to see robust growth in sales in the upcoming fiscal year.
