Tech is not only surviving the coronavirus pandemic—it’s thriving. As the outbreak and the looming recession pummeled many sectors of the stock market this year, cash-rich technology giants ranging from Amazon to Microsoft to Netflix held up well and some younger, smaller tech firms such as the digital-signature software firm DocuSign and Zoom Video Communications raced ahead.
As people spent more time at home, companies that helped them make the best use of the Internet served as a lifeline for functions ranging from business transactions, communications and health to shopping and entertainment.
Now, as investors struggle to make sense of the new economic and financial landscape, they are trying to sort out which tech companies will continue to take the lead…which will fall behind…and which have seen their stocks jump so far so fast that they will struggle to squeeze out further gains.
Bottom Line Personal asked stock fund manager Alan Tu, CFA, to help guide our readers through this new era of technology leaders…
The New Tech Normal
For hundreds of millions of people, technology that they used sparingly in the past or hadn’t gotten around to trying became essential this year. They will continue to use this technology because it makes them feel more productive, more efficient and safer. Three major societal shifts that investors should keep an eye on…
Consumers will likely continue to spend more time at home. For some period, they will remain wary of air travel, face-to-face business meetings and socializing in restaurants, movie theaters and stadiums. That benefits “stay-at-home” companies, including those that provide streaming video or facilitate personal and business interaction over the Internet.
A lot of corporate work will migrate to the cloud. The trend will certainly continue as many companies permanently move a percentage of their workforces to remote positions. This benefits various software providers that help companies monitor and access data over remote Internet servers and make collaboration among employees easier. A larger remote workforce also means greater vulnerability to malware and e-mail viruses, which heightens the need for cybersecurity software.
Consumers and companies will buy, sell and advertise more goods and services online. E-commerce was a well-established trend before COVID-19, but it made up only about 11% of total US retail sales. It will greatly accelerate as consumers grow even more dependent on e-commerce giants…hundreds of thousands of out-of-work individuals start their own e-commerce businesses…and brick-and-mortar retail stores develop better online presences. As one result, digital advertising will continue to take market share from print and TV, even though advertising overall has slumped this year amid shutdowns ranging from theaters and stadiums to retail stores and flights.
Stocks That Benefit
Here is a strategy to help you focus on tech stocks that have advantages in this new era…
Invest in giant US companies that are among those dominating their areas of the technology industry and that have stellar balance sheets. My fund’s top holdings include the e-commerce behemoth Amazon…home-entertainment leader Netflix…Facebook and Google parent Alphabet, which have a virtual duopoly on US digital advertising…and Microsoft, which has successfully reinvented itself as a cloud software business. Caution: Some of these companies face short-term challenges. For instance, the temporary drop in overall advertising will hurt Google and Facebook.
Also focus on fast-growing, less widely owned stocks in the following attractive areas of technology investing.
Stay-at-home stocks…
Zoom Video Communications (ZM). The number of daily users of this online videoconferencing service, which went public last year, soared from 10 million last December to 200 million in late March. The stock already jumped 157% in 2020 as of May 15, even as Zoom’s growing popularity made it vulnerable to hackers who hijacked videoconferences and harassed participants. I think the stock can continue to rise. Zoom’s missteps are normal for a tech company with explosive growth, and it has responded fairly quickly by patching bugs and removing features that presented privacy risks.
DocuSign (DOCU). If you have signed digital documents to refinance your mortgage, update your will or open a brokerage account recently, you probably have used this leading provider of digital-signature software. Thousands of law firms, real estate companies, financial institutions and other companies use it to reduce the time and cost of everyday deal-making, negotiations and approval of contracts. DocuSign, whose stock jumped 70% this year as of May 15, has a long runway for growth because the industry is expected to expand by 35% a year and hit $9 billion in global sales by 2024.
Cloud software stocks…
Proofpoint (PFPT). About 90% of all cyberattacks on companies start with someone clicking on a malicious link in an e-mail. On a daily basis, this cloud-based security software company scans for malware and digital viruses in 600 million e-mails, more than seven million mobile apps and hundreds of thousands of social-media accounts. Proofpoint’s customers include half of the Fortune 1000 companies, as well as 14 of the top 15 research universities in the world.
Slack Technologies (WORK) makes cloud-based software that functions like a continuous chat room and e-mail alternative for groups of employees. Although Slack faces competition from Microsoft and Facebook, its software is much easier to set up and use. Its 12 million active users include employees at major entities such as the US Department of Veterans Affairs, Capital One, Nike and Walmart.
E-commerce stocks…
Shopify (SHOP). This software company’s suite of apps starts at just $29 a month and allows small start-up businesses to compete against much bigger retailers. These small merchants can build their own fully functional online stores and customize them. For additional fees, Shopify also provides back-room services such as payment processing, inventory tracking and shipping, as well as a financing program, Shopify Capital, which offers cash advances to merchants that can be repaid through future sales.
Sea Ltd. (SE) is the leading e-commerce marketplace in Southeast Asia and Taiwan. More than 200 million users a month buy and sell products through its online platform called Shopee. Like Amazon, it also sells its own private-label brands directly to consumers. The company, which went public in 2017, had nearly $3 billion in revenue last year, about three times the 2018 revenue. Also, Sea has a PayPal–like digital-payment service and digital-gaming division, whose first release, Free Fire, has grossed more than $1 billion worldwide since launching two years ago. Sea’s stock, which soared 255% last year and another 54% in 2020 through May 15, should continue to do well as all three of Sea’s divisions grow rapidly.
