The part of the economy that relies on in-person interaction is a wreck, but digital businesses are riding high. And for good reason. Shelter-in-place -- voluntary or ordered -- isn't over yet.
As the world still tries to manage the coronavirus pandemic while waiting for a viable treatment or vaccine to become available, businesses are adjusting to a new reality. Three technology stocks I think will do well now and on into the future are Zynga (ZNGA), American Software (AMSWA -2.21%), and Limelight Networks (EGIO 0.13%).
Mobile gaming continues its global advance
Mobile gaming creator Zynga is a company I have followed for years but never quite gotten around to purchasing. Back in early April, I called the small company responsible for popular titles like Words With Friends, FarmVille, Zynga Poker, and CSR Racing a buy, but amid the market meltdown other stocks ultimately won out for my investment funds. Since then, Zynga shares are up over 40%. What can I say? You win some, you lose some.
But even a single quarter's-worth of stellar performance isn't what makes a stock great, and I think Zynga's run isn't over. Part of the recent surge is due to the acquisition of Peak, the Istanbul, Turkey-based company best-known for puzzle games Toon Blast and Toy Blast. The $1.8 billion deal is a large one for Zynga (post-takeover market cap of the combined businesses is currently $10.6 billion), but adding Peak to the fold increases Zynga's global player base by some 60%. And even after shelling out $900 million in cash to purchase Peak (the other $900 million was paid via the issuance of new stock), Zynga still has about $600 million in cash and equivalents on its balance sheet.
It's actually not the first time Zynga has crossed paths with Peak. Under the guiding hand of CEO Frank Gibeau, who has been overseeing the mobile video game company's resurgence since early 2016, Zynga acquired Peak's mobile card game business in late 2017 to add it to its own card game portfolio. Now Peak in its entirety is in the fold, and this access to more mobile game players outside of the U.S. should work in Zynga's favor in coming years. Focusing on social and live events has been a winning strategy for Zynga, and I expect it will continue to be as global video game playing increases in popularity.
As for the stock itself, it trades for 5.3 times one-year forward expected sales -- a discount compared to its larger video game creator peers Activision Blizzard (ATVI 0.12%), Electronic Arts (EA -0.43%), and Take-Two Interactive (TTWO -0.77%), considering its own organic growth and the addition of Peak. This is my top pick in the video game industry right now.
New challenges for logistics and delivery
I'm always on the lookout for small stocks that are addressing (or better yet, disrupting) big markets in a novel way. While some aspects of consumer spending have taken a hit the last few months due to the coronavirus, e-commerce is going gangbusters and reshaping the way shopping is done. However, for retailers and manufacturers of goods, e-commerce presents new challenges. The logistics infrastructure of yesteryear is dead, and figuring out how to deliver merchandise on the customer's terms -- a long campaign of Amazon's (AMZN -1.16%) retail marketplace -- is now a problem for everyone to tackle.
In searching for logistics tech companies using artificial intelligence stock research tool Noonum.ai, I kept landing on American Software. The small company (with a current market cap of $539 million) has been around for decades, slowly building momentum in recent years as e-commerce grows. It creates supply chain and retail planning software -- chief among them Logility, an AI and cloud tool that helps organizations optimize inventory and manage customer demand.
Why American Software now? After all, e-commerce isn't new, and this tiny company competes against larger planning software outfits like Anaplan (PLAN) (which I have a small position in) as well as the software solutions many companies develop themselves in-house. But American Software has been generating growth from cloud-delivered versions of its software in the last year, with the tiny subscription-based revenue segment growing 64% year over year to $6.28 million in the last quarter ended April 30, 2020. With many companies grappling with shelter-in-place and trying to figure out how to deliver product to customers, I think American Software could generate some serious interest going forward.
Of course, this is a tiny company, and its peers have much deeper pockets. I'll be taking a very small position (less than 1% of my total portfolio value) and just nibbling on the stock from time to time going forward. Nevertheless, shares trade for just 4.3 times one-year forward sales and 24.8 times trailing 12-month free cash flow (revenue less cash operating and capital expenses). There's a chance this small-cap stock has some serious upside as a result of the stay-at-home trend, so my interest has been piqued.
Connected TV is becoming the rule, not the exception
Limelight Networks is another small company that hit my radar earlier this year, and I recently purchased a small position in it. The company is a content delivery network (CDN), an internet infrastructure firm tapped by organizations to securely deliver data. It's no secret that the internet has undergone monumental changes from a simple source of information to a service delivery mega-highway. According to network hardware giant Cisco (CSCO -0.35%), the single largest driver of internet data growth is video, and TV delivered via a network connection has skyrocketed in recent months, putting stress on internet service providers.
As for Limelight itself, it saw a big jump in revenue the last couple quarters thanks to the launch of Disney+ (DIS -0.67%). Other connected TV services like Comcast's (CMCSA 0.17%) Peacock are getting wide releases this summer. And in general, Limelight has said that 90% of respondents to its surveys say they are relying on video chat for essential communication, 70% are using livestream video to stay up-to-date on current news events, and 22% have virtually met with a doctor recently. Esports, virtual concerts, and online workouts are also on the rise amid shelter-in-place.
Some of these items may play less of a role in promoting growth as the world starts to pick up the pieces left from the pandemic, but one thing is for sure: Connected TV and online video are here to stay. Specializing in this type of content delivery, I think Limelight's recent rise will stick. Other upstart CDNs like Fastly (FSLY -0.40%) have surged triple-digit percentages this year, Fastly in particular getting a boost from e-commerce. Limelight has had its share of the spotlight too, with its stock rising over 80% in 2020 to-date as of this writing. But the entertainment industry is massive, and its migration to internet connectivity is far from over. Thus, I think this small CDN is a better buy than some of its even higher-flying upstart peers.
Even after its run-up, Limelight trades for only 3.5 times expected one-year forward sales. Free cash flow dips in and out of negative territory as the company scales its global operations to keep up with demand, but I like its prospects over the long haul as video increasingly goes the way of the internet.