The Dow Jones just ended its worst-ever first quarter, falling over 24% in this period. The coronavirus pandemic has spread to all major economies, crippling several industries and driving stock markets to multi-year lows. The Dow Jones and S&P 500 Index are currently trading more than 25% below their recent record highs.
Investors are sweating over the decline in portfolio value in a market that is expected to be volatile in the short term. Several tech stocks are trading below record highs, but a few have managed to outperform the coronavirus-led bear market.
Here we look at three such companies that have a sound business model to not only help them endure the near-term weakness, but also give investors an opportunity to create massive wealth over the long term.
Image source: Getty Images.
A streaming giant
The COVID-19 pandemic has resulted in countrywide lockdowns and business closures all around the world. As people spend a significant amount of time at home, streaming services have witnessed a surge in demand.
The world's largest streaming company is Netflix (NFLX 0.31%), which has lost less than 4% in market cap since Feb. 19, when the broader markets peaked.
In fact, Netflix managed to crush market returns even during the great recession of 2008-2009. While Netflix was in a nascent stage then, it is now an established player with a strong balance sheet and huge market presence.
With 167 million global subscribers, Netflix is well poised to gain customers, especially in the coronavirus-hit countries of Spain, Hong Kong, Italy, and South Korea.
According to a Strategy Analytics report, coronavirus is expected to add 5% in to all global streaming video subscriptions -- including but not limited to Netflix -- this year. This represents an increase of 47 million subscribers in 2020.
While Netflix should benefit from an increase in subscribers, it will likely reduce its spending on the creation of original content this year because of the pandemic. All shows under production have been put on hold, and will restart once the global situation eases. Netflix was initially estimated to spend $17.3 billion in original content creation in 2020, according to one BMO Capital Markets analyst.
A cloud-based enterprise-facing company
Shares of Okta (OKTA -0.39%), an enterprise-based access management and digital identity management company, are trading more than 15% below record highs. The stock has created considerable wealth since its IPO back in April 2017, easily crushing broader market returns since then.
Okta continues to benefit from the increase in cyberattacks and data breaches, which has been a key driver of top-line growth. Now, as many companies run their businesses remotely, the demand for Okta products should increase as employees remain vulnerable to digital theft.
Okta's cloud-based application provides user authentication for several software applications using a single login process. In the last quarter, Okta increased its customer base by 550, taking the total count to 7,950. A dollar retention rate of 119% also indicates that existing customers are subscribing to additional services.
Okta continues to reinvest a significant portion of its revenue toward product development, which in turn will improve customer retention and drive sales growth.
A top collaboration player
Another company that has benefited from the work from home trend is Zoom Video (ZM -1.43%). The stock has gained roughly 17% since Feb. 19, making it one of the top-performing companies in the sell-off.
In the fiscal year ended in January, Zoom reported sales of $622.6 million, an increase of 88% year over year. In the fourth quarter, Zoom sales rose 78% to $188.3 million, while adjusted earnings per share was up 275% at $0.15.
The company reported free cash flow of $26.6 million and ended fiscal 2020 with a cash balance of $855 million. The revenue growth was driven by stellar growth in high-paying customers. In the fourth quarter, the number of Zoom customers with an average contract value of $100,000 was up 86%.
Zoom stock touched an all-time high last month before receding recently due to privacy issues. There have been multiple reports of malicious actors increasingly hijacking video conferences, compromising users' security and privacy. Company CEO Eric S. Yuan has acknowledged these security flaws and is making a concentrated effort to address related concerns.
Zoom has experienced an exponential rise in user growth and downloads in recent times. Its daily active users have increased from 10 million in December to 200 million in March.
Further, the expanding total addressable market for online collaboration makes it an ideal long-term bet for growth investors.
The verdict
Netflix, Okta, and Zoom are all growth stocks. This means they trade at a higher valuation multiple which makes these companies vulnerable in a broader market sell-off. However, all three tech stocks have outperformed the current market sell-off due to an increase in demand for their products and services. While most companies will experience a fall in top-line growth, Zoom, Netflix, and Okta should continue to see robust growth in sales in the upcoming fiscal year.
There is a good chance the three stocks will continue to beat the broader indexes in the long-term due to a shift in consumer preference. Netflix and peer streaming companies will experience solid revenue growth in the upcoming decade due to the cord-cutting phenomenon. Enterprises all over the globe are looking to prioritize data security which will drive demand for Okta's products and solutions. It is quite possible that remote work is here to stay, long after the world is free of COVID-19, making Zoom Video a solid bet for the upcoming decade.
