The past month has witnessed some unprecedented volatility in the equity markets. This extreme volatility is likely to continue for a while as governments around the world try to address the adverse effects of the COVID-19 pandemic. This pandemic has led to a partial or total shutdown in many countries as well as border closings and has completely decimated several economic sectors.
Between Feb. 19, 2020, and March 24, 2020, major indexes such as the Dow Jones Industrial Average and the S&P 500 fell by 30% and 29% respectively.
A marketwide correction across industries like this one can provide an opportunity to buy high-quality stocks at lower valuations. Let's take a closer look at three such stocks that have, based on their current prices, become much more attractive in terms of valuation as potential additions to your investment portfolio.
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1. ServiceNow: A SaaS wealth creator
When it comes to creating massive wealth, few can beat ServiceNow (NOW 1.13%). The company went public at a price of $18 per share in June 2012. The stock is currently trading around $282, which means it has returned over 1,470% in less than eight years. ServiceNow shares touched an all-time high of $362.95 in early February, indicating returns of close to 2,000% before the sell-off resulted in a 21.5% pullback.
This enterprise-facing software-as-a-service company helps clients automate certain business processes and operations. ServiceNow initially targeted automation of repeat functions in the customer service space and has since expanded its services across verticals including finance, human resources, and security.
Organizations all around the world are spending heavily on digital transformation projects, which will continue to benefit ServiceNow in the upcoming years. According to a Markets and Markets report, the digital transformation market is estimated to touch a staggering $665 billion by 2023, up from $290 billion in 2018.
Wall Street continues to remain impressed by ServiceNow's high customer retention rate that stood at 97% in the December quarter. The company signed its largest IT automation deal with the U.S. Department of Veteran Affairs in the last quarter as it aims to become the top strategic partner to CIOs (Chief Information Officers) around the world.
ServiceNow's subscription sales were up 35% in the fourth quarter at $899 million, while subscription billings grew 36% to $1.3 billion, touching the billion-dollar mark for the first time ever. In the March quarter, ServiceNow has estimated subscription sales between $975 million and $980 million and billings between $1.04 billion and $1.045 billion.
Subscription sales account for 95% of total sales, which will help the company tide over a downturn similar to the current one. Subscription sales ensure a steady stream of revenue and offset cyclicality.
2. Visa: A leading payments processor
Shares of Visa (V -0.19%) are trading around $162, which is roughly 24% below its record high set just before the recent crash. While banks and financial institutions have experienced a considerable sell-off due to lower consumer spending and the rising chance of delinquencies, credit card processing companies such as Visa are also likely to revise their forecasts lower for the upcoming quarters.
Customers around the world will buy essential goods and services and delay shopping for other products. Several credit card avenues, including restaurants, airlines, and malls, have shut down, driving Visa shares lower.
However, the stock gained close to 14% in a single trading session on March 24 on the news of an impending stimulus deal, sparking a major rally in the U.S. markets. Furthermore, people will still need to pay for essential purchases such as groceries, medicines, and other essentials, making Visa extremely relevant in these turbulent times.
The most popular form of payment in North America is through credit cards, and Visa has a 53% share in the United States market. In 2018, Visa processed close to $2 trillion in payments on its network.
Visa is not a lender and just facilitates payments between two parties, making it a far less risky stock in this bear market. It does not have to worry about the risk of defaults and will come roaring back once the COVID-19 crisis is over and the economy returns to more normal levels.
3. NVIDIA: A semiconductor giant
Shares of NVIDIA (NVDA 5.21%) are trading around $251, which is almost 21% below record highs set just before the crash. The stock doubled between May 2019 and February 2020 before the COVID-19 sell-off dragged it lower to its current price.
NVIDIA is a major player in the graphics processing units (GPUs) space, and its products are used across gaming, artificial intelligence (AI), and data center industries. The company's strong balance sheet and market leadership in the AI space resulted in an analyst upgrade on March 24.
In the last reported quarter, NVIDIA's sales from the gaming segment accounted for 48% of revenue and increased 56% year over year. Gaming graphic cards may continue to drive sales in the upcoming quarters as video games become one of the primary forms of entertainment following statewide lockdowns.
NVIDIA has considerable exposure to China, a country that was once the epicenter of the COVID-19 pandemic but is now slowly getting back on its feet, which might offset weak sales from other geographies.
Managing a downturn
These three companies are market leaders in their domains. ServiceNow, Visa, and NVIDIA have huge addressable markets, low leverage, and enough cash reserves to manage this downturn.
It will be difficult to gauge the accuracy of valuations right now as they are based on forward sales and earnings that will definitely be revised lower during upcoming earnings reports. However, in terms of trailing 12-month sales, ServiceNow has a price-to-sales multiple of 11.6 times. This ratio for Visa and NVIDIA stands at 14.9 and 11.7, respectively.
While this multiple can be considered expensive for most companies, Service Now, Visa, and NVIDIA will continue to post double-digit top-line growth in the next few years, justifying the stock price and making the recent pullback an opportunity for investors to buy in at an attractive price.
