As of this writing, the stock market (as measured by the S&P 500 index) is down 29% from all-time highs. What started as just another potentially worrisome infectious disease in China has sent the world into lockdown mode. The economy is up in the air, and it's anyone's guess when the spread of coronavirus and investor panic will ease up.
For some high-growth technology stocks, the drop has been even more dramatic. That makes sense as investors reduce risk in companies that were valued as if the good times were going to last forever. However, while some of these high-growth firms' investment theses may wind up with serious holes in them, some could wind up in an even stronger position post-COVID-19 crisis than they were before. Three that could fit that bill are The Trade Desk (TTD -0.55%), Twilio (TWLO 1.62%), and Fastly (FSLY 3.79%).
Advertising done right when fear is high
On one hand, major global events like the one created by COVID-19 means it's great to be in advertising. Fear sells like nothing else, and audience engagement is going through the roof as people tune in to get the latest updates. But on the other hand, it's terrible timing to be in the advertising industry, as spending on ads tends to plummet when the economy is under duress.
So what's an advertising platform to do? Keep trying to gobble up market share to prepare for the eventual rebound in ad spend. And I expect that's just what The Trade Desk will do. That's because the company's data-driven cloud-based platform for ad campaign buyers helps companies get the most bang for their promotional buck. Rather than traditional ads that go out to the masses indiscriminately, The Trade Desk helps its customers target a specific audience at the right time. Which, in turn, means eyeballs are seeing information that's relevant to them, and the advertiser gets a higher return on its spending. It's a win-win.
Now that's not to say that The Trade Desk isn't going to feel some pain for at least a couple of quarters. Marketing spend is sure to decline, so it would be no surprise if the company's guidance for at least 30.5% revenue growth in 2020 takes a hit as the world clamps down to contain the pandemic. However, with so many cooped up at home and household spending getting disrupted, the move to data-enhanced targeted ads is likely to pick up pace as companies try to figure out how to optimize their sales. It's been a massive opportunity for The Trade Desk to date, and it should help the small technologist continue to gain market share in the massive global ad industry.
But why buy now? After peaking at just over $300 a share in February 2020, the stock has cratered in grand fashion -- down over 50% as of this writing. Though it is funneling ample amounts of cash back into sales and marketing to maximize its potential, The Trade Desk is free cash flow positive (what's left after cash operating and capital expenses are paid), and had $255 million in cash and short-term investments on the books as of the end of 2019. This small ad purchasing platform is thus in great shape, and should be all set to thrive again once the dark storm clouds clear.
Digital communications for an increasingly digital age
I sincerely regret adding to my position in Twilio in February 2020 right after the company reported full-year 2019 results. If I had waited just a month -- just one month -- I could have been purchasing right now for nearly $0.60 on the dollar.
However, I take consolation in the fact that I wasn't buying when Twilio stock was at all-time highs last summer. Shares have now backtracked some 50% since then, even after the company posted 47% organic growth in 2019 and completed its takeover of email communications peer SendGrid (which pushed total revenue growth to 75% for the year). No bother. As is prudent with high-growth stocks, my position is still very small, and I will continue buying post-COVID fallout. At 8.5 times trailing 12-month sales, shares look undervalued.
Of course, that assumes Twilio can keep expanding sales at a fast pace. As with The Trade Desk, management's previous call for at least 30% revenue growth this year is now likely at risk of a downgrade. However, in the long run, Twilio's toolkit of software-defined communications will likely get a second look from organizations that have been ignoring or dragging their feet updating their operations. One unintended consequence of so many people being put in quarantine, working from home, and being encouraged to avoid public places, is that the coronavirus outbreak will likely have the effect of speeding up the adoption of digital-based methods of staying in touch.
In Twilio's arsenal are software programs for enabling text, online chat and video, and cloud-based call center services. Consumers and businesses alike are sure to increase their use of all of the above.
Edge computing to get a shot in the arm
While I was hasty in making another purchase of Twilio, I was still sitting on my hands and awaiting 2019 IPO stock Fastly's final report for 2019. While results were stellar -- full-year revenue grew 39%, including 44% in the fourth quarter -- its shares have fallen over 40% since then as investors take risk off of the table with the global economy in uncharted waters.
And that is pry wise. Of the three companies here, Fastly is the smallest and still operates at a steep loss. Adjusted net losses last year were $35.2 million on $200 million in revenue. However, after making its public debut last year, this small technologist is well-funded to pursue its ambitious growth goals with $131 million in cash and short-term securities. Though its outlook for at least 27.5% revenue upside in 2020 has no doubt been muddied, the long-term potential is still there.
Fastly operates an internet content delivery network (CDN) based in the cloud that focuses on "edge" networks. While the cloud houses data and provides computing power at a remote data center and delivers it to the end user via the internet, edge computing occurs at or near the source of the request for data. Fastly itself defines the edge as the point when a company loses control of data as it enters a user's device or network. Many applications -- from business tools to consumer products -- are only just beginning to make use of edge network and CDN capabilities. But the need for faster response times and growing mobile web traffic is expected to accelerate the move.
And if the coronavirus pandemic is to have any lasting impact on the world, a big and perhaps permanent bump in web traffic would be my bet. If so, that will play right into the hands of Fastly and its edge CDN. Of course, if you make a purchase, keep it small so you can make more purchases during the ups and downs inherent with small-growth stocks. But this one is definitely worth a look as the world adapts to the current shock it's in.