As the novel coronavirus pandemic continues to rage, people in different parts of the world have faced quarantine or government regulated lockdown.
There have also been increasing concerns on the mental health during the lockdown. As an example, a study indicated that 35% of the people experienced mental distress during the first month of Covid-19 outbreak in China. Data is unlikely to be significantly different in other parts of the world.
However, technology has come to the forefront to play an important role as a stress buster during the quarantine. To back my view, a recent study for the U.K. shows that adults spent 45 hours a week watching TV and online video during lockdown. Further, 12 million new users signed up for streaming services. This is just one example of tech stocks that have kept people same during quarantine.
Here, we’ll discuss three tech stocks to buy that have been in limelight through the pandemic. The impact of the pandemic is likely to be long-lasting and these tech stocks can continue to deliver shareholder value. Besides being a stress buster for people globally.
Tech Stocks to Buy: Netflix (NFLX)
NFLX stock has been in a steady uptrend as subscribers continue to grow during the pandemic. It’s among the top tech stocks to buy for the near as well as the long term.
The initial statement from the company’s second quarter results for 2020 puts things into perspective. According to the company:
We live in uncertain times with restrictions on what we can do socially and many people are turning to entertainment for relaxation, connection, comfort and stimulation.
For the second quarter, the company’s global streaming paid membership was 192.95 million. It was higher by 27.3% on a year-on-year basis. Netflix expects paid membership to increase to 195.45 million in the third quarter.
As this trend sustains, I expect healthy growth in top-line, EBITDA and free cash flows. With the company delivering free cash flow of $899 million for the last quarter, the annualized FCF visibility is $3.5 billion. As FCF swells, there will be ample scope for value creation and I expect NFLX stock to trend higher.
Recently, RBC assigned a price target of $620 for the stock. This would imply a 13% upside from current levels. Surely, Netflix has been a stress buster for million during the quarantine besides being a value creator for shareholders.
Activision Blizzard (ATVI)
Video gaming and esports have also been a stress-buster for people during quarantine. According to Verizon (NYSE:VZ), “overall traffic related to internet gaming has increased 75% since restrictions were imposed in America.”
In terms of size, the global video game market is forecasted to be worth $159 billion in fiscal year 2020. This is four times the box-office revenue of $43 billion in 2019. Clearly, with a big addressable market, Activision Blizzard is a major beneficiary.
It’s not surprising that ATVI stock has moved higher by 44% in the last six months. For the second quarter, the company’s revenue, net bookings and earnings per share were well ahead of guidance.
With the success of Call of Duty coupled with the benefit of the lockdown, the company’s numbers are likely to remain strong. The company also reported a healthy FCF of $755 million for the recent quarter. Dividends can potentially increase in the coming quarters if cash generation remains robust.
Without doubt, video gaming is a major source of entertainment as people avoid outings. Activision Blizzard is probably the best play in this segment besides Tencent Holdings (OTCMKTS:TCEHY).
Zoom Video Communications (ZM)
ZM stock has skyrocketed by 400% this year with the company quadrupling revenue. Further, the company’s profits surged 10x in the company’s fiscal Q2 2021 on a year-on-year basis. The results speak of the impact Zoom has had during the pandemic.
From a growth perspective, Zoom is not just about growth from corporate customers. More than 100,000 schools worldwide are using Zoom for online classes.
The company is also rapidly expanding globally and the addressable market is significant considering the fact that the pandemic impact will be long lasting. In addition, Zoom is also being used for virtual social gatherings.
With multiple growth triggers, ZM stock can continue to boost portfolio returns. I also like the fact that the company’s FCF has surged. In its most recent quarter the company reported FCF of $373 million, which implies an annualized FCF of $1.5 billion. Considering the pace of growth, I would not be surprised if FCF is well in excess of $2 billion in the next fiscal year.
Zoom Video has helped keep people sane during quarantine. At the same time, ZM stock is likely to deliver insane returns just as it has done in the last six months (+209%).
Faisal Humayun is a senior research analyst with 12 years of industry experience in the field of credit research, equity research and financial modelling. Faisal has authored over 1,500 stock specific articles with focus on the technology, energy and commodities sector. As of this writing, Faisal Humayun did not hold a position in any of the aforementioned securities.
