Strong first-quarter earnings reports from multiple tech companies demonstrated the power of stay-at-home headwinds for online business. As the economy and markets face massive interruptions over the current pandemic, the gap between companies thriving during the pandemic and those feeling the pain will only get wider.
So technology companies that grew their online business and developed cutting edge solutions will get more business. Retail firms relying on a physical presence, automotive showrooms and restaurants will have trouble adapting.
Yet this generalized view excludes the businesses in the latter group that are embracing technology to get a competitive edge. For example, restaurants that use technology to handle online orders and food delivery will likely thrive. So it makes sense then, that technology investors will want to hone in on companies that are embracing megatrends like AI, 5G, and cybersecurity.
“American firms have historically led these megatrends, but China’s growing economy and especially huge government subsidies for technology investments are reducing the gap,” said Boston University Professor of Finance Dirk Hackbarth in an email to InvestorPlace. This suggests that investors should not only hold the top companies in the United States but also include China-based companies. Per Hackbarth:
“To the extent that China’s economy may rebound before the US reaches its trough this year, it will provide another advantage for Chinese firms, such as Alibaba and Baidu (NASDAQ:BIDU), to better compete with the likes of Microsoft and Alphabet (NASDAQ:GOOG).”
Of course, that doesn’t mean American tech companies are out of the picture, but rather that Chinese firms are staking larger claims in the space. And that’s an opportunity for investors to buy into these 7 technology stocks:
- Facebook (NASDAQ:FB)
- Amazon (NASDAQ:AMZN)
- Alibaba (NYSE:BABA)
- Microsoft (NASDAQ:MSFT)
- Intel (NASDAQ:INTC)
- Logitech (NASDAQ:LOGI)
- Qualcomm (NASDAQ:QCOM)
These 7 technology stocks to buy are worth your time even amidst the market uncertainty and fear brought on the pandemic.
User activity surged on Facebook in the first quarter. Daily active users topped 1.734 billion, up from 1.562 billion last year. Worldwide, the company’s average revenue per user (ARPU) rose from $6.42 last year to $6.95.
With limited entertainment at home and online social networks functioning as the main channel for communications, Facebook’s popularity will only grow.
Though the world is changing quickly, many big companies are scaling back on advertising spend. Facebook will update its plan to moderate its expense growth. For example, it will spend less on business functions while still expecting profit margins dropping this year. In the first quarter, ad revenue rose 17% year-on-year to $17.4 billion. But as the pandemic picked up steam, revenue slowed starting in the second week of March.
“The pandemic has benefited large technology companies such as Facebook and Amazon because consumers are staying at home and using more of their services although the decline in advertising dollars has hurt Facebook,” Professor Vidyanand Choudhary, Senior Associate Dean of Information Systems at the Paul Merage School of Business, University of California Irvine, told InvestorPlace in an email.
To minimize the damage of lower customer advertising budgets, Facebook has refocused on delivering free and paid tools to help businesses match to the right audience. This will help companies get the most out of their expenses.
As expected, Amazon posted a solid 26.39% growth in revenue to $75.45 billion. But after the earnings report on April 30, 2020, the stock actually pulled back.
Amazon announced it would take on $4 billion in new charges related to the Covid-19 pandemic. This cost is necessary to protect staff health and to care for its workers, after a series of low-impact, high-profile strikes at various Amazon warehouses over the past two months.
Amazon said that it will spend around $300 million to implement Covid-19 testing in the second quarter. It will build protocols to maximize the safety of its workers. It also said on the conference call that “most of it is hitting in people cost, both in productivity and also in wages and relief funds and all. So can’t really tell how long that will last.”
Beyond the e-commerce business, Amazon Web Services continues to grow at a phenomenal rate. Revenue grew 33% Y/Y to a $41 billion run rate. Thanks to a breadth of customers, Amazon has millions of active customers from a broad range of businesses. This includes enterprises, start-ups, and the public sector.
The stay-at-home order only drove demand for gaming, remote learning, entertainment and videoconferencing higher. This is a permanent shift that will suport AWS growth in the next few quarters.
Alibaba likely thrived through the shutdown in China earlier this year. And because demand for its business software is increasing, the Chinese conglomerate said it would invest $28 billion into cloud infrastructure over the next three years.
As reported by Reuters, Alibaba will invest in “semiconductor and operating system development as well as building out its data centre infrastructure.” During the pandemic in China, Alibaba saw that software usage increased sharply. For example, DingTalk enabled schools and businesses to chat online. But the exceptionally high traffic led to poor network performance.
In March, Alibaba’s package and meal delivery units returned to pre-coronavirus levels. The resilience of the business shows how well the company as a whole may rebound. Now that China is moving out of lockdown, investors should expect BABA stock to outperform as its market share grows.
Assuming the following metrics below in a 5-year discounted cash flow growth exit model, BABA stock is worth $230.65:
|Discount Rate||11.0% – 10.0%||10.50%|
|Perpetuity Growth Rate||3.5% – 4.5%||4.00%|
|Fair Value||$205.13 – $265.43||$230.65|
Data Courtesy of finbox
In offering productivity and business process solutions, Microsoft software and subscription sales rose during the lockdown. Revenue grew 15% in the unit. Revenue from the Intelligent Cloud unit grew by 27%. But the Office 365 and the Teams App were the real star performers.
Microsoft 365 and Teams empower people and organizations by offering secure remote work. Microsoft said that “as work norms evolve, organizations are realizing they need a comprehensive solution that brings together communications, collaboration, and business process, built on a foundation of security and privacy. Microsoft Teams supports multiple communications modalities in a shared workspace.”
Covid-19 had a minimal net impact on Microsoft’s net revenue in the third quarter. Cloud usage increased; this includes the use of Azure, advanced security solutions, Power Platform, and Windows Virtual Desktop. That growth more than offset the slowdown in transactional licensing. Small and medium businesses are struggling, hurting sales for that segment.
Windows OEM Pro revenue grew by 5%. Once again, demand from remote work and learning needs more than offset the supply chain constraints in China.
Remote work is driving demand for personal computers and laptops. This will boost sales for Intel computer chips in the near-term. In Q1/2020, the company reported its PC-centric business grew by 14%.
Intel highlighted the need for PCs and networking technologies to bring people closer together. For example, hospitals struggling with the virus or children connected to remote classrooms all need an Intel-powered solution. But Intel’s potential for growth isn’t just about telework, but also the cutting edge of autonomous vehicle technology. Per Professor Choudhary:
“Given the risk of COVID transmission in a taxi or ride-hailing service, the crisis may give a further impetus to self-driving technology as well as AI. When self-driving technology comes to fruition, it is likely to have a very substantial and possibly disruptive impact on our economy and society.“
Artificial Intelligence is a big growth opportunity for Intel. The company’s Mobileye unit is currently developing autonomous driving solutions. As demand for embedded AI capabilities grows, Mobileye’s business will continue growing.
In the first quarter, Mobileye’s revenue grew by 22%. The unit continued to penetrate the autonomous driving market and launched new IQ program launches. Its strength more than offset a weak automotive market.
The rise of video conferencing at home will give Logitech a big lift. Before the pandemic, Logitech already benefited from the need for video conferencing in every room, the greater support for computer online gaming titles and content creation by end-users. These overarching trends will support the long-term growth picture for Logitech over the next few years.
Logitech discontinued various special edition Yeti mics in the last quarter. After solving supply constraints, it is positioned for long-term growth in the Blue Microphones category.
Last quarter, Logitech reported revenue growth of 4% Y/Y. Operating income grew 6% to $152 million. For full-year 2020, the company forecast sales growth in the mid to high single digits. Operating income will be in the range of $375 to $385 million.
Applying this data in a discounted model: EBITDA exit, the stock is worth nearly $50. Here are the revenue estimates:
|(USD in millions)||Input Projections|
|Fiscal Years Ending||19-Mar||20-Mar||21-Mar||22-Mar||23-Mar||24-Mar|
|% of Revenue||12.20%||12.60%||13.00%||12.00%||11.00%||13.00%|
Qualcomm is at the heart of a shift from 3G and 4G to 5G. Regardless of the pandemic shutting down much of the global economy, the company’s QCT division has continued to innovate. Its design wins, plus a higher share of dollar content will lift its revenue per unit sold.
In the second quarter, Qualcomm signed over 85 5G license agreements. In China, the company entered “into new long-term global patent license agreements with two leading Chinese handset suppliers OPPO and Vivo to cover 5G multi-mode mobile devices.”
Demand is so strong that Qualcomm isn’t changing its calendar year 2020 5G smartphone forecast. But it is forecasting the overall handset market will fall 30% in the upcoming June quarter.
The near-term downtrend may give bears enough reason to sell the stock. Patient investors may take advantage of a company trading at a discount. Also, QCOM stock has a strong quality score (based on return on investment, for example):
|Return on Assets||12.60%||0.10%||0.10%|
Data courtesy of Stock Rover
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.