Let's get one thing straight: No stock is immune to volatility when the market mood turns sour. When investors are reacting strongly to the latest headlines and macroeconomic indicators, stocks tend to move together in the same direction. Sales of exchange-traded funds (ETFs) and mutual funds cause shares to be sold across the board, and emotions can dominate trading decisions.
Yet these situations can be opportunities for the long-term investor. The market is legitimately concerned about the impact of the COVID-19 pandemic, and some companies will be affected negatively by the economic fallout for months or even years. But other businesses may emerge relatively unscathed or even get a boost from evolving trends and demand.
Here are three businesses that are largely immune to disruption from COVID-19. Axon Enterprise (NASDAQ:AXON) will be selling essential products and services to law enforcement agencies no matter how severe the pandemic gets, and e-commerce businesses such as MercadoLibre (NASDAQ:MELI) and pet food seller Chewy (NYSE:CHWY) should only get stronger as the transition to online shopping accelerates.
One silver lining of the coronavirus pandemic is that crime rates have declined around the country, though it's probably fair to say that the respite is only temporary, and law enforcement agencies aren't going to let their guards down.
Axon is best known as the seller of TASER non-lethal weapons, but the company strives to disrupt the entire law enforcement process with devices and software that increase productivity and effectiveness. The company has expanded into body cameras and dashboard cameras that are connected to cloud-based evidence repositories with records management software that tie video evidence to incident reports. And the company has been particularly savvy in wrapping their devices and software into subscription-based packages that are friendly to law enforcement budget planning and give the company predictable recurring revenue and a wide moat.
Axon reported a fantastic fourth quarter, growing revenue 50% to $172 million on the strength of new versions of TASERs and body cams. Non-GAAP (adjusted) earnings per share were $0.41 compared with $0.08 in the prior-year period. Recurring contracts made up 71% of revenue during the quarter, up from 55% the previous year. For full-year 2019, revenue grew 26% and adjusted earnings per share were up 41%.
The stock isn't cheap at 63 times forward earnings estimates, but that valuation is typical for this stock. Shares were pounded during the market's panic over COVID-19, falling from an all-time high of $90 in February to just $50 in mid-March. The stock has rebounded since then but is still well below its high.
No matter what happens with the pandemic, people will keep feeding (and spoiling) their pets. In fact, shelters across the country have reported a surge in adoptions as people yearn for some companionship while they wait out stay-at-home orders.
If a pet owner wants to buy food, medication, toys, or kitty litter without leaving the house, it's all available online -- and that's where Chewy comes in. The online pet supply vendor has seen a surge in volume since the pandemic hit and growth was phenomenal even before then.
Net sales in the fourth quarter were $1.35 billion, up 35% year over year. The number of active customers grew 27% to 13.5 million, and net sales per active customer came in at a whopping $360, up 10%. Many of Chewy's customers sign up for it auto-ship program, subscription-like orders that give the company a hefty proportion of recurring revenue. In the fourth quarter, 70% of Chewy's revenue came from customers who have placed an auto-ship order in the past year, and those sales grew 31% year over year. Gross margin also expanded 3.2 percentage points as customers increased their purchases of Chewy's high-margin private-label brands.
Starting in late February, the company saw an acceleration in sales that has continued into April. Management said on the latest earnings call it expects sales growth in the first quarter to land between 35% and 37%.
Chewy's mission is to "get big fast" and "get fit fast." The company is investing heavily in growth, building fulfillment centers, developing private brands, and growing its Chewy Pharmacy business. The company lost $252 million in 2019 and will continue to operate at a loss for the foreseeable future, much as Amazon did in its early years. Chewy was essentially break-even on a free cash flow basis last year.
Until recently, shares of Chewy could be bought below their closing price of $35 the first day they traded publicly last June. The stock has surged in April after the fantastic fourth-quarter report, but shares still sell for about the same price-to-sales multiple as they did when the stock made its public debut.
Speaking of e-commerce, you'd expect shares of the giant companies that specialize in delivering goods to people in their homes would be soaring at a time when people are hunkered down. That hasn't been universally true. MercadoLibre, the huge online commerce and payments platform serving Latin America, saw its shares plunge as much as 44% from their all-time high in February.
To be sure, some of that drop was profit-taking by investors who saw their investment nearly double in 2019. But apparently the market was concerned that COVID-19 would hit the Latin American economy hard and hurt the company's business. Recent results would suggest, however, that MercadoLibre could be immune to the pandemic's fallout.
Latin America is still in the early days of e-commerce, and sales through the company's online marketplace have been growing robustly. In the fourth quarter, gross merchandise volume grew 20% in U.S. dollars and 40% on a currency-neutral basis. The number of unique buyers accelerated, growing 27% year over year, and the number of live listings on the marketplace ballooned over 50%.
Has the pandemic caused Latin American consumers to reduce their spending with MercadoLibre? No. In fact, the evidence points to the opposite. According to the Mexican newspaper Milenio, sales have increased significantly in key categories with pharmacy products up 114% and household care and laundry products getting a 403% boost.
But the real growth story at MercadoLibre is the wild success of its payments platform. Total payment volume in the fourth quarter hit $8.7 billion, up 63% year over year and 99% excluding currency effects. Overall, company revenue during the quarter totaled $674 million, an increase of 58% in U.S. dollars and 84% on a currency-neutral basis.
Far from hurting the company's results, the pandemic could accelerate the trends that are fundamental to MercadoLibre's business. The market seems to have awakened to that fact, and shares have recovered about half of their total decline. The stock is still a buy based on its long-term prospects, and in the near term, the business is well inoculated against the COVID-19 threat.