As the global economy tries to mount a recovery from the adverse effects created by the coronavirus pandemic, now might be a good time to take a moment to consider the "great redundancy crisis." That's the phrase I'm using to describe the COVID-19 partial lockdown and the subsequent economic damage it has caused.
Hindsight, as they say, is 20/20. While we've known for several years now that times are changing, the pandemic has exposed that some parts of this economy were definitely operating on borrowed time. This crisis has shown that the world has an excess of real estate, services based on in-person interaction, big retailers offering little differentiation, needless commuting, and so on. In its aftermath, it's becoming more and more clear that some parts of the economy will need to completely evolve if they are to survive.
Few consumers or businesses can ever be truly prepared for a shutdown like the one the world is trying to manage, but some sectors of the economy (like travel, for example) will eventually rebound. Others, though, will need to rebuild a more lean, efficient, and profitable future that cuts out redundant spending and plans for digital-first operations.
Five stocks I think will thrive post-"great redundancy crisis" are Comcast (NASDAQ:CMCSA), Limelight Networks (NASDAQ:LLNW), Etsy (NASDAQ:ETSY), Shopify (NYSE:SHOP), and Square (NYSE:SQ). Let's take a closer look at why that is.
1. Comcast and 2. Limelight Networks: Redistributing the internet to where it's needed most
At this point, it's too soon to say how many businesses will resume in-person operations to the same extent they maintained them prior to the pandemic. However, the work-from-home movement will stick -- or at least some of it will. Mobility has matured, cloud computing services are prolific, and cybersecurity support for a dispersed workforce has advanced considerably. There is simply less need for offices than in the past, and it took a pandemic to force the issue. As a result, many households will be in need of an internet service upgrade. That's where Comcast comes in.
It's true that cable TV cord-cutting is ongoing, the film studio and Universal Studios theme parks are closed, and NBC broadcasting has taken a hit because sports and the 2020 Summer Olympics were delayed until next year. However, 70% of the company's pre-tax earnings come from the highly profitable and still growing cable communications segment, which includes high-speed internet and related services. It may be a sleepy stock pick, but as the U.S. adjusts to less commuting and more remote work, Comcast will thrive. The stock trades for 15.9 times trailing 12-month earnings, a figure likely to deteriorate as the company reports on the period during the worst of the lockdown, but the communications giant will be just fine.
With fewer office network connections, that means consumer internet usage will rise. And online video streaming is one of the highest areas of internet data usage growth. There are all sorts of new streaming services, and video delivered via the web is growing increasingly commonplace, according to Limelight Networks. The company operates a modern-day infrastructure network by securely delivering web content for its customers to end-users. Limelight's specialty? Internet video.
This is a tiny outfit that dips in and out of positive free cash flow (profitability measured as revenue less cash operating and capital expenses), but it's currently growing fast thanks to the launch of streaming services Disney+ last year and Comcast's Peacock this year. That trend will continue as Limelight's customers rely on it to get video delivered to homes around the globe. Paired with Comcast's slow-and-steady progress, these two stocks are a solid bet as businesses consolidate their footprints and consumer internet usage picks up.
3. Etsy and 4. Shopify: The liberation of retail
The internet has been steadily reshaping the retail landscape, and the coronavirus is accelerating those changes. Consumers demand variety, delivered to them on their terms. That has rendered many brick-and-mortar retail models woefully outdated. It has also paved the way for entrepreneurs and small business owners to better compete against national retailers again.
Helping enable the democratization of retail are online marketplace Etsy and retail software provider Shopify. Both stocks have been off to the races this year, each up more than 150% so far. As a result, neither company comes cheap as a stock buy. Etsy trades for 74 times trailing 12-month free cash flow, and Shopify intentionally funnels spare cash back into operations to promote growth, which means it doesn't turn much in the way of profit. It trades for an astounding 41 times expected one-year forward revenue. Understandably, many investors are taking a hard pass on purchasing at this point because of the rich price tags.
For Shopify, I can't say "buy" right this moment, as I've started taking some profits recently after an incredible multi-year run. But I'm holding onto it as a core portfolio holding, and for investors planning on owning for the next decade and beyond, I think Shopify's ascendancy will continue. Etsy's run has been impressive too, but it's still OK to nibble on even at this point -- assuming an investor plans on buying more should there be another short-term double-digit percentage drop in the stock price as there was earlier this year. Timing when that might happen is someone else's guess, so I say make a small purchase and forget about it for at least a few years.
The coronavirus is proving the merits of online shopping, and for many businesses, it's the only path forward (despite new challenges like managing delivery expenses). The good news is that operating an online retail shop is easier than ever. For Etsy and Shopify, the opportunity is massive, with annual global retail spending estimated at about $25 trillion, not to mention the adjacent payment and logistics services they also offer. Etsy and Shopify currently garner small slivers of that pie (Etsy's annualized value of merchandise sold on its platform in Q1 2020 was over $5 billion, Shopify's $70 billion). I also like that both companies are positioning themselves as true partners to small business rather than competing merchandisers themselves. Expect a very wild ride, especially after both have more than doubled in the last six months, but I'm in for the long haul as the days of physical retail continue to wane.
5. Square: Simplifying banking services in the digital age
As e-commerce has grown, technology has been able to sink its teeth into the adjacent financial industry as well. Square got its start as a provider of payment processing and online management tools for businesses, but it has steadily grown its ecosystem beyond that. Providing access to loans as well as payroll and tax services, Square has started to blur the lines between e-commerce, banking, and accounting services. In this digital age, a one-stop-shop for small businesses trying to navigate the new normal, Square makes a lot of sense over the myriad traditional banks out there.
The same goes for its consumer-facing Cash App, which competes with PayPal's Venmo peer-to-peer money sharing platform. On this front Square has also started to encroach on traditional banking territory, offering a debit card that links to a Cash App digital wallet, traditional checking account features, and stock and cryptocurrency investing. The financial industry is discombobulated, and some consolidation of basic functions into a single point of contact is something that's been needed for a while now. With more people stuck at home and using digital tools like never before, there's room for Square to pick up plenty of new users.
This fintech stock has doubled so far this year as well, but trades for 8.5 times one-year forward expected revenue. The ride could get bumpy as many of Square's customers are still struggling during the lockdown, but the longer-term prospects for the company are solid. As with the other four listed here, I think Square will emerge an even stronger company during this redundancy crisis brought on by COVID-19.