While not many stocks have increased in value during the market downturn, there are plenty of stocks that are holding up much better than the broader market. Some grocery stores and online-delivery services are doing well in this environment, but there are other companies in other industries proving their worth, too.
Here's why investors are bullish on Activision Blizzard (ATVI), Peloton Interactive (PTON -7.32%), and Logitech International (LOGI -6.43%).
Image source: Getty Images.
1. Activision Blizzard: A cash-rich game maker
Offices are closed and schools are suspended. I don't expect teenagers and college kids to spend all that time catching up on homework.
Video game companies are in a great position to capitalize on this stay-at-home situation. Like movies and music, the gaming industry has shifted to the digital delivery of games, which helps a company like Activision Blizzard maintain a direct connection with the 409 million players who played its games last quarter.
That number will likely increase in the near term. Activision saw its monthly active users jump last fall after the release of Call of Duty: Mobile. The recent release of Call of Duty: Warzone on PC and console should keep the momentum going. The official Call of Duty account on Twitter announced that Warzone has already reached 30 million players in less than a month.
The best thing about these games is that they are free to play and provide a massive player base for Activision to monetize with sales of additional content and in-game advertising.
CEO Bobby Kotick sees mobile gaming as the company's next big growth opportunity, along with esports. With traditional media in stagnation or decline, advertisers are increasingly looking to digital channels to market their brands to a wider audience. Gaming is a great channel for these ad buyers to reach, given that millennials are typically seen as a difficult audience to reach for major brands.
Activision Blizzard makes several of the leading franchises in the industry, including World of Warcraft, Overwatch, and the popular mobile title Candy Crush. It's one of the industry leaders, generating $6.5 billion in revenue last year. The balance sheet has plenty of cash, and the business generated $1.7 billion in free cash flow last year. This is a company that's built to survive and thrive in the current environment and also pays a small dividend.
2. Peloton: A virus-free workout option
Peloton is a growing fitness brand that sells bikes and treadmills for people who like to workout at home. Growth has been impressive through the holiday quarter, with revenue up 77% year over year. The company makes money by selling customers a connected fitness product and then getting them to subscribe to digital workout sessions streamed to the bike for $39 per month. The company also offers access to yoga, meditation, and other workouts through the Peloton app, which costs $12.99 per month.
While sales could be pressured during a recession since a Peloton bike is not cheap at $2,245, the company offers interest-free financing, which makes the price more tolerable. However, the novel coronavirus caused the company to cancel deliveries of treadmills after March 18 because unlike the bikes, the treadmills are more complicated to set up and require a technician to violate your quarantine zone. That might cause some interruption to its sales momentum.
Still, the stock has dramatically outperformed the market during the recent sell-off, as investors anticipate higher interest in what the company offers. Peloton could see an increase in bike orders from people who don't want to risk riding alongside a car at a stoplight just as someone sneezes coronavirus out the window.
Peloton has seen increasing engagement over the last few years, and given the circumstances, the company could see its average monthly workouts -- the key measure of engagement -- hit a new high for the current quarter.
The latest quarterly report showed a big increase in average monthly workouts year over year, going from 9.7 in the year-ago quarter to 12.6 in the most recent quarter. The high was 13.9 in the quarter ended March of last year, which is when customers are typically most engaged with Peloton products.
Peloton recently announced that it was extending the free trial with its app to 90 days to bring in more customers. Some workout apps, including Peloton's, have experienced a huge spike in downloads recently, according to Apptopia.
Long term, Peloton is well-positioned to win over those who have decided that the cost of gym memberships is not worth the hassle, especially when Peloton offers access to professional trainers in the comfort of a customer's home at about the same cost over a 10-year period.
Image source: Logitech International.
3. Logitech: A profitable work-from-home provider
Logitech makes essential computer peripherals for work and gaming, but video collaboration is one of its fastest-growing sales categories. The company reported a modest sales increase for the last quarter, but demand remained strong for its three largest categories of video collaboration, gaming, and creativity and productivity. Video-collaboration products increased 24% year over year for the December-ending quarter, while gaming sales increased by 15%.
Management expects a small hit to its operating income in the short term due to supply-chain disruptions, but the company's ability to sell more computing essentials with more people working from home makes Logitech a potential winner in the short term. The stock is only down modestly over the last one-month period at the time of writing.
There are other work-from-home stocks that have seen their share prices rise lately, such as Slack Technologies and Zoom Video Communications. But those stocks are richly valued with high price-to-sales ratios.
Logitech is not growing as fast as Slack or Zoom but is not valued like them, either. Management expects long-term sales growth to be in the high-single-digit range, as there are still a lot of offices around the world without video-conferencing gear. On a forward price-to-earnings basis, the stock sells for 20 times this year's consensus earnings estimate.
