The COVID-19 pandemic ushered in market volatility, and conventional wisdom says to only invest in companies providing essential services. The stocks of many essential retailers and consumer staples are hitting highs as investors crowd into these "safe" investments.
But narrowing vision too much causes investors to miss out on good opportunities. While technology stocks are often deemed more risky, Pinterest (NYSE:PINS), Yext (NYSE:YEXT), and Redfin (NASDAQ:RDFN) are three companies that I would buy right now, even in the face of economic uncertainty. Here's why.
Pinterest's long-term tailwind
Pinterest is often lumped together with other social media platforms, but its usage is different. Users tend to browse the platform searching for inspiration in a variety of areas, like fashion, home decor, and crafts. The company's user base is increasing both domestically and internationally, even though that growing user base isn't very monetized.
Since users are typically looking to do something, it's a natural evolution to make Pinterest more "shoppable." The company is currently inviting retailers to sell directly inside the platform, for a fee. By rolling out monetization features like this, it can increase its average revenue per user for years to come.
Pinterest doesn't report first-quarter earnings until May 5, but it has provided preliminary information. The company said active users rose to between 365 million and 367 million, good for 26% growth year over year at the midpoint. That's an acceleration from the 22% user growth in the first quarter last year.
The company has pulled full-year 2020 guidance, due to the uncertainty caused by the coronavirus. And various platforms that generate ad revenue, like Pinterest, have already reported a reduction in advertising spending. This is a short-term danger to Pinterest. But accelerating user growth coupled with new monetization options are long-term tailwinds that outweigh the present risk.
When stakes are high, Yext's validated answers are essential
These days we're inundated with information, and not all of it is reliable. Therefore, it's beneficial to have validated answers to questions, and that's what Yext provides. By teaming up with companies and governments, it can ensure the general online populace that the information they're getting is accurate. Yext is increasingly an essential player in the age of disinformation.
The COVID-19 pandemic has provided an opportunity to validate this theory. Both Alabama and New Jersey hired Yext to ensure their citizens are getting validated information regarding the coronavirus. More recently, the U.S. Department of State used Yext to launch the same service for the entire country, demonstrating the company's growing merit.
Even restaurants are faced with a disinformation challenge because of COVID-19. Diners are necessarily ordering takeout, yet restaurant menus always change. Finding an up-to-date menu is hard. To overcome this, a company called Olo partnered with Yext to deliver verified menus. Olo is a top ordering software company used by hundreds of restaurant chains, which again demonstrates Yext's usefulness now more than ever.
Its stock has fallen, as investors fret over pending reductions in corporate software spending. It's true that the service that Yext provides isn't as essential as, say, payroll software. It's possible Yext's customer retention could take a short-term hit. Then again, could new customers like governments and Olo offset any potential losses? I'm willing to bet more companies still need Yext than don't.
Redfin is disrupting this change-resistant industry
Think of all the industries digitally transformed over the past decade, and the real estate business stands out as particularly stubborn to change. Yet Redfin aims to make the entire home transaction process digital. Its products include a brokerage, mortgage origination, and title services. And it strives to provide a superior experience.
As a broker, Redfin employs its own agents who are paid a salary, aligning their incentives more closely to the customer's. The author and economist Steven Levitt provides a compelling discussion of misaligned incentives for real estate agents in his book Freakonomics. Getting top dollar for a house might mean a lot of extra work. And when agents get a percentage, outsize effort disproportionately translates to only a marginal increase in pay, a disincentive to agents. Redfin's results bear this out. A house listed with Redfin sells for 98.7% of its list price on average, which is about $1,900 more than the rest of the industry.
Redfin's platform appears to be where the industry should go, but old habits die hard. Buying or selling a home is a scary process, and it's comforting to just do things how they've always been done. But because of COVID-19, homes can't be shown like they could in the past. As a result, since the beginning of March, Redfin virtual walkthroughs have soared 300%, and one in seven homes sold on Redfin were bought by people who digitally toured the home. In short, the coronavirus could drive Redfin adoption.
The global economy is entering a recession, which will likely affect the real estate industry. And Redfin has paused its home-buying service, RedfinNow, which is an important piece in its growth. For these reasons, I consider Redfin the riskiest of these three technology stocks in the near term. Even so, I would buy this stock today for the role it's playing to digitally reimagine this crucial economic sector.