As the novel coronavirus outbreak enters its third month, Wall Street has finally succumbed to fears that the disease may continue to spread.
For investors looking at the major stock market indices last week, it was like watching a slow-motion train wreck. In just 10 trading session (or less), the Dow Jones Industrial Average (DJINDICES:^DJI), the S&P 500 (SNPINDEX:^GSPC), and the NASDAQ (NASDAQINDEX:^IXIC) have each entered correction territory, losing 14.3%, 13.4%, and 12.6%, respectively, as of this writing. By definition, a correction has occurred when an index has fallen 10% or more from its recent highs.
Watching this all play out can be unnerving, but it can also represent a compelling opportunity for investors with cool heads. While many businesses will suffer some negative effects from the health crisis, some are better positioned than others to ride it out, and potentially even benefit from the situation.
Let's look at three businesses that have a better than average chance of getting through the COVID-19 epidemic, setting their stocks up well for the coming recovery: streaming pioneer Roku (NASDAQ:ROKU), social media giant Facebook (NASDAQ:FB), and Google search parent Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG).
1. Roku: there's always something to watch
As the spread of coronavirus deepens, a growing number of health experts -- including the U.S. Centers for Disease Control and Prevention (CDC) -- are warning consumers to be prepared for extended stays at home if the disease continues to spread throughout communities, as families may be forced to ride out the outbreak.
If consumers are sequestered at home, one way to pass the time will be by watching streaming video -- and no company is better positioned to benefit than Roku. In the fourth quarter, the company reported nearly 37 million active accounts, which grew by 36% year over year and represents about 29% of the U.S. population.
Contrary to popular opinion, Roku makes the majority of its revenue from advertising on its platform, which soared 71% year over year to $260 million. Engagement is growing as well, with streaming hours jumping 60% to 11.7 billion.
Anyone with a mobile device can easily log in. It's also important to point out that 1-in-3 smart TVs sold in the U.S. in 2019 already uses the Roku operating system, so even if they're trapped at home, new customers can easily sign up.
Needham analyst Laura Martin even called out Roku as a stock that could benefit if the coronavirus spreads further in the U.S. As more people stay home and watch TV, this will increase "the number of hours viewed and ad units available for Roku to sell above our current revenue and profit projections."
2. Facebook: staying connected -- from a distance
Another favorite pastime among consumers is social media, which might also see a boost with larger numbers of people staying in, with the biggest beneficiary likely being Facebook.
About 2.5 billion people access Facebook's platform every month, while 1.66 billion check in every day. This powerful network effect has proven to be remarkably resilient to external factors. People can use the site to check in with friends and family, in one place and from the comfort of their computer or mobile device.
Its social media reach isn't confined to Facebook, however, with Instagram, WhatsApp, and Messenger filling out its family of services. Roughly 2.9 billion people used at least one of those platforms every month and 2.3 billion log in daily. This makes it highly unlikely that engagement will take a hit from the coronavirus epidemic.
Like Roku, Facebook makes the lion's share of its revenue from advertising, a business that's still going strong. In the fourth quarter, revenue of $21 billion climbed 25% year over year, though it decelerated from the 30% pace in the prior-year quarter.
Profits grew at a slower pace, up just 8%, as the company spent heavily on headcount to address privacy concerns and secure the platform. Engagement continued to be robust, however, as ad impressions across the company's multiple platforms increased 29%.
Let's face it: people aren't going to abandon social media if they're forced to stay at home -- just the opposite. Social media activity might just reach new heights, and Facebook will be there to answer the call.
3. Alphabet: Google searches go on
In the face of the growing outbreak, larger numbers of people may be forced to take refuge in their homes, and keeping up with the latest updates will be as important as ever. While there are many ways to follow the news and search for the most up-to-date information, for many consumers, there's just one way to achieve that: "Google it."
While parent company Alphabet has irons in a lot of fires -- artificial intelligence, cloud computing, self-driving cars, to name just a few -- it's still advertising from Google's search engine that pays the bills. During the fourth quarter, Alphabet generated revenue of $46 billion, up 17% year over year, and about 83% of that came from Google advertising.
Another segment that will hold up well if consumers spend more time indoors is YouTube. Ad revenue from the streaming video site increased 31% year over year in the fourth quarter. The platform boasts more than 2 billion users in over 100 countries and in 80 languages, and viewers watch over 1 billion hours of content every day.
Even more impressive is a stat that was announced on the conference call: YouTube has more than 20 million music and premium paid subscribers, while YouTube TV has 2 million.
Another of Google's many sidelines -- the Google Play Store -- will also likely see increased usage if consumers hole up in their houses, as the demand for apps won't decline much in the face of the epidemic.
The internet is one of the top destinations for people at home and at work, and they won't change if the coronavirus outbreak spreads. In fact, if people spend more time at home, they'll spend more time online, which plays right to Google's strengths.
A bit of perspective
The upbeat outlook for these technology stocks certainly doesn't mean they won't be subject to some short-term pain. In trading last week, Facebook lost 4.6%, and Alphabet A shares declined 5.9%. Roku was actually up 3.9% for the week.
Many investors are currently in panic mode and the wholesale selling shows that they're selling both good businesses and bad -- which is never a path to solid returns.
Those that keep their heads and choose not to "throw out the baby with the bathwater" will benefit when the coronavirus outbreak inevitably subsides.