The current market volatility related to efforts to combat the coronavirus epidemic has created challenges for investors looking for a safe haven in the trading storm.
It's not always easy knowing what to look for when trying to make a safe long-term stock investment, especially now when seemingly "safe" companies are getting hit by forces outside their control and losing stock value.
But there are at least three companies that have weathered this recent storm, and they are holding up better than the broader market. These companies continue to provide shareholders with growth in their forward earnings, a strong balance sheet, and a focus on revenue diversification. And, more importantly, each has demonstrated a high probability of success for the next several decades. Let's take a closer look at them and see whether they might make good additions to your stock portfolio.
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1. Activision Blizzard: Consistent growth is more than a game
With a portfolio of popular game franchises such as Call of Duty, World of Warcraft, and Candy Crush, Activision's (ATVI) portfolio has produced growth in revenue of 6.83% compound annual growth rate (CAGR) from 2015 to 2019 -- in addition to improving the net income margin 3.4 percentage points from 19.8% in 2015 to 23.2% in 2019. This suggests Activision Blizzard knows how to increase its revenue on a consistent basis and how to keep costs under control while it does so.
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Activision's recent launch of Call of Duty mobile has been a success for the company. Winning Mobile Game of the Year, it placed within the top 15 grossing games in the United States during 2019. In addition, Call of Duty: Black Ops 4 grew 50% year-over-year during the recent fourth-quarter, ending 2019 with more console sales than any other franchise globally in the last 10 of 11 years. Lastly, the recent launch of Call of Duty: Warzone on March 10 generated significant buzz, as the game was downloaded over 15 million times within the first four days of release.
The second highest-grossing revenue segment for Activision is a gaming franchise developed by King called Candy Crush, a 2016 acquisition for $5.9 billion. Candy Crush was a top-grossing game in the United States during the recent fourth quarter and all of 2019. It was assisted by the success of the newly released Candy Crush Saga. Generating the highest number of monthly active users (MAUs) during the fourth quarter of 2019 at 249 million, King is proving to be a growing and highly successful segment for Activision Blizzard.
Activision's sum of its parts has helped it generate stable revenue growth. But Activision's strength moving forward is its improved ability to make potential acquisitions. A low debt-to-EBITDA (years it will take Activision to pay debts) ratio of 1.09 in addition to cash on hand of $5.8 billion has helped position the company to look around for the next successful acquisition that might further fuel growth and keep the virtuous cycle going.
Activision projects 2020 to deliver $6.5 billion in net revenue, which would be flat in comparison to 2019, and $1.85 earnings per share (EPS), $0.11 below 2019's EPS of $1.96; however, there is potential to deliver higher-than-expected results as social distancing is forcing consumers to stay at home, potentially spending more time playing games and more money on those games.
Activision's forward price-to-earnings ratio of 24.13 is in line with Activision's top industry competitors Electronic Arts (EA 0.83%) and Take-Two Interactive (TTWO 1.96%) forward price to earnings of 22.63 and 25.54, respectively. As one of the only video game developers paying a dividend, Activision offers a forward dividend yield of 0.7%, and its dividend has been growing for nine years at a five-year compound annual growth rate (CAGR) of 13.1%. The share price of Activision has held steady in 2020, with a year-to-date return of 1% against the S&P 500's year-to-date loss of 15% -- suggesting this stock offers protection from the current market volatility.
Growth into the next several decades for Activision involves the expansion of popular franchises driven from the three segments of Activision, Blizzard Entertainment, and King. In addition, Activision's cash on hand and low debt should position the company to acquire growth and continue to deliver consistent revenue growth for the next several decades.
2. Intuit: Calculating how to benefit from personal finance
Intuit (INTU 2.48%) develops and sells financial software related to tax preparation, accounting, and financial reporting. Popular software products such as Quickbooks, TurboTax, and Mint delivered year-over-year revenue growth of 13.2% and a gross profit margin of 82.6% in 2019. A shareholder of Intuit over the last 10 years would have seen their stock gain about 628% in that time (compared to 130% for the S&P 500 over the same period), but that doesn't mean the growth is over.
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Most of Intuit's revenue comes from Quickbooks, delivering $3.53 billion or 52% of overall revenue during fiscal 2019 -- growing 15.4% year over year from fiscal 2018. The remaining revenue is made up of consumer revenue driven by TurboTax and Mint software, and the other 8% from the strategic partner segment, providing professional services to accountants.
Adding to the impressive portfolio of offerings, Intuit acquired Credit Karma, a personal finance company, in February 2020 for $7.1 billion. Intuit stated in the press release that Credit Karma generated $1 billion in revenue in 2019, which increased 20% year-over-year. Intuit's CEO Sasan Goodarzi stated that Intuit and Credit Karma will "bring together consumers and financial institutions to lower costs for consumers." With over 100 million members (90% of revenue is from existing members of Credit Karma), Credit Karma grew its member base three-fold over the last five years, showing an impressive growth rate. Lastly, this opportunity opens the doors for Intuit to cross-sell products to consumers, enabling a stronger production integration.
Intuit has a strong balance sheet with very little debt (about $754 million) and a trailing 12-month operating income of $1.9 billion. Intuit's forward dividend yield of 0.92% has been growing for eight years, with a CAGR of 18.8% over the last five years. Intuit's low debt-to-EBITDA of 0.55 in addition to an impressive interest coverage ratio (the ability for a company to pay interest expenses on debt) of 90 puts Intuit in a safe position to maintain the growing dividend. The share price of Intuit is trading at a forward price-to-earnings ratio of 30.6, which is high in relation to the sector median of 18.7; however, Intuit's trailing 12-month earnings before interest and tax (EBIT) margin of 26.8% is hard to match in the sector, in addition to projected forward revenue growth of 11.3%.
The Federal Reserve Bank of New York announced during the fourth quarter of 2019 that household debt grew by $193 billion and now totals $14.5 trillion -- which is $1.5 trillion higher than the Great Recession of 2008-09. As U.S. household debt continues to grow, consumers will need tools to manage debt and develop budgets, which is where the cross-selling opportunity for Intuit's products comes into play. As Intuit continues to create value for consumers, shareholders will benefit in the long-term.
3. Amazon.com: Delivering on new ideas for growth
Amazon's (AMZN 0.81%) share price has shown strength during the coronavirus pandemic as demand for merchandise has soared, forcing the company to hire 100,000 new workers to keep up with demand. Amazon just closed the books on 2019, showing growth on all accounts. Year-over-year revenue grew by 20.4%, operating profit grew 16%, and diluted earnings per share (EPS) grew 14.3%. Holding Amazon shares over the last five years has given shareholders a 427% increase, and the outlook continues to be strong for the company.
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A significant contributor to Amazon's growth in recent years is its Amazon Web Services (AWS) unit. By Amazon's definition, AWS is "the world's most comprehensive and broadly adopted cloud platform," which simply means a cloud service where customers can purchase cloud-based products, such as computer storage, security, networking, and enterprise applications, to name a few. This subsidiary of Amazon is very important to the long-term growth of the company and has been performing very well with a 34% year-over-year quarterly growth reported in the fourth quarter of 2019.
AWS generated $35 billion in net sales during 2019, which accounted for 12.5% of Amazon's revenue. However, AWS's strong profitability for the company delivered $9.2 billion in operating income and made up 63.2% of Amazon's overall operating income for 2019. AWS is still early in its growth cycle and should continue to expand its share of the cloud market for many years to come.
Additionally, Amazon is diversifying into several markets, such as the recent $753 million acquisition of PillPack in 2018, an online pharmacy providing convenience to prescriptions, and the 2017 acquisition of Whole Foods for $13.7 billion, stepping into the grocery segment. Not including Whole Foods stores, Amazon's development of a cashier-less store has finally come to fruition, as the company opened the first Amazon Go Grocery store in Seattle in February 2020. Using the same technology within the operating Amazon Go convenience stores, the newly opened 10,000-square-foot store will be the first of many. This will not only change the way consumers shop but will potentially lower the cost of products sold -- potentially forcing the entire industry to change to a cashier-less shopping experience. Amazon has been shopping out this cashier-less technology to other grocery chains as a potential source of additional income as well.
Amazon's share price is trading at 85 times earnings, which is higher than the sector median of 8.8; however, the multiple isn't outlandish with a forward earnings-per-share growth of 25.1%. As Amazon continues to focus on international growth, the 2019 international segment loss of $1.7 billion should slowly head into the black, pushing the bottom line higher for the company. Looking forward decades is not an easy task by any measure, but if Amazon can continue to grow into new industries and territories while expanding AWS, there is no reason to doubt this tech stock will continue to grow at an impressive rate.
