The rapid spread of the coronavirus pandemic has plunged the economy into its first bear market in more than a decade. History has shown that when panic is at its peak is generally the best time to buy stocks -- especially strong, well-run companies with a long track record of success.
Some of the best-known technology companies in the world have also been among the best performers over the past decade. Facebook (NASDAQ:FB), Apple (NASDAQ:AAPL), Amazon.com (NASDAQ:AMZN), Netflix (NASDAQ:NFLX), and Google parent Alphabet (NASDAQ:GOOGL) (NASDAQ:GOOG) -- make up the vaunted FAANG acronym. While not part of this group, another company that has produced remarkable gains is Microsoft (NASDAQ:MSFT).
Let's look at the pros and cons of each of these market leaders as it relates to the current situation and whether they warrant your consideration now.
Social media titan Facebook could well be the definition of the network effect. For those looking to stay in touch with family and friends, particularly in the face of the growing number of government-created stay-at-home orders, there's simply no other platform that has the scale and user base to match Facebook. The company has more than 1.66 billion daily active users and 2.5 billion that log in every month, figures that will no doubt increase as lockdowns continue. Add in the company's other platforms -- Instagram, Messenger, and WhatsApp -- and you can see why Facebook is the king of social media.
There is a downside, however. As the economy slips further into a bear market and potentially a recession, marketing budgets are typically the first thing to get slashed as businesses work to trim budgets and navigate a downturn. Some analysts are predicting that ad revenues overall will fall by more than 10%, with some companies hurt more than others. Since Facebook gets the majority of its revenue from advertising, it will no doubt take a hit.
The company's balance sheet should help it weather the storm, however, as Facebook has $19 billion in cash and no debt.
There are already signs that Amazon may the biggest winner from the outbreak of coronavirus, as many shoppers are turning to e-commerce and home delivery to avoid going out and going without certain necessities. Amazon is shifting its strategy to meet the unprecedented demand, hiring 100,000 new workers and no longer accepting nonessential items at its warehouses, focusing on consumer staples and medical supplies. Prime Video is also seeing a boost as consumers are forced to hunker down at home. The need for its Amazon Web Services (AWS) cloud platform isn't going anywhere, either.
If there's a fly in the ointment, it's the specter of regulatory worries, which were already present before coronavirus struck. Since then, Amazon has been working to reduce price-gouging for things like face masks and hand sanitizer, which will likely only increase the regulatory scrutiny. At the same time, the company was forced to temporarily shutter its Prime Pantry grocery delivery in the face of unparalleled demand.
Amazon has sufficient reserves, however, with cash and marketable securities of $55 billion and just $23 billion in debt, and more cash coming in every day.
With consumers hunkered down at home, retail stores around the world shuttered, and its manufacturing slow to regain momentum, Apple could be the poster child for the potential for negative impact from the coronavirus. Buying high-end devices may well be the furthest thing from people's minds right now.
It's not all bad news, however, as services and wearables make up a growing part of Apple's revenue -- 25% in all last quarter. Also, the company App Store and its online shop are open for business.
Fortunately, regarding the higher-ticket items, many believe that the sales Apple is missing out on are effectively delayed, not lost for good. One of the biggest reasons to bet on the iPhone maker, however, is its massive cash pile, with $207 billion in cash and marketable securities and just $108 billion in debt, leaving a war chest of $99 billion, enough to ride out even a prolonged downturn.
If we learned anything from the Great Recession of 2008-09, it's that consumers won't likely cancel Netflix in the face of economic adversity. There is plenty of anecdotal evidence that the company is seeing an uptick in demand, not only from existing subscribers riding out the outbreak at home but also new customers joining the flock. Inexpensive streaming video is giving shut-ins a much-needed respite, with a massive library of programming to choose from. Netflix was even forced to throttle its streaming speeds in Europe in the face of unprecedented demand to help ease internet congestion.
The biggest downside to Netflix is twofold. First, like every other company in Hollywood, it has been forced to shut down production of its original movies and television series to keep its cast and crews safe, so new shows will be delayed. Then there's the issue of its balance sheet. Netflix has $5 billion in cash, but unfortunately, its long-term debt clocks in at a massive $15 billion, so it's heavily leveraged. However, with more than $5 billion in revenue each quarter and increasing demand, the streaming pioneer should be just fine.
Alphabet has several advantages that make the search leader a port in the storm. The need for search is greater than ever, as consumers seek out the latest information on coronavirus. Streaming demand is also climbing, so YouTube will also see increased viewing, particularly among the younger population. As one of the fastest-growing cloud providers, that part of the business will also likely be fine.
However, since Alphabet gets 83% of its revenue from advertising, it faces the same inevitable hit as Facebook as marketers slash their ad budgets.
On the plus side, Alphabet has a rock-solid balance sheet, with cash and marketable securities of nearly $120 billion, but just $5 billion in long-term debt.
With a number of subscription-based, contractually obligated business products like Office 365 and the increasing demand for videoconferencing services like Teams, there plenty of reasons to believe Microsoft has a strong foundation to get through the current crisis. The need for its Azure and other commercial cloud services will likely see an uptick as many businesses continue to work digitally. The company even has a strong balance sheet with $134 billion in cash and just $70 billion in debt.
That won't be enough to completely shelter Microsoft from the effect of coronavirus. The company has already warned that it won't meet its quarterly guidance for its fiscal third quarter, with a bigger hit to its more personal computing segment. Microsoft's supply chain has been slow to recover from the coronavirus shutdown, which will negatively impact its Windows OEM and Surface businesses.
The bottom line
Institutional investors are betting heavily that each of these companies will be among the biggest winners when the inevitable recovery emerges, according to an analysis by RBC Capital Markets. In a report referencing demographic and technological trends represented by these stocks, analyst Lori Calvasina wrote, "For the most part the secular growth theme has held up well since the S&P 500 index peaked on Feb. 19," she noted. Put another way, each of these stocks has outperformed the broader market (as of this writing) since mid-February. Additionally, while asset managers have abandoned a number of high-profile stocks in recent weeks, "professional investors weren't shunning the secular growth theme." This bodes well for each of the companies outlined above.
Let's be clear: The market could fall further from here. Unfortunately, nobody has a crystal ball or can accurately predict when the carnage will end. I'm not saying back up the truck and put all your money in the market now. However, targeted investments in these quality companies in the coming weeks and months will certainly prove to be a wise move three to five years from now.