The lockdowns to halt the spread of the coronavirus have been disastrous for businesses reliant on in-person interaction. But for many companies that have made a pivot to digital-based operations -- or those that were online all along -- 2020 hasn't been so bad. It's clear that large swaths of the economy have become redundant in this new digital era, and the future favors more nimble and technology-driven enterprise like never before.
In fact, some businesses have experienced explosive growth in the face of the pandemic and could have plenty left in the tank in the years to come. Three that are worth a look right now are Livongo Health (LVGO), Universal Display (OLED -1.06%), and StoneCo (STNE -4.39%).
1. Livongo Health: A digital healthcare experience
For many industries, a physical presence is absolutely necessary. Healthcare is one such example. In cases like surgeries, an in-person visit with a medical professional is irreplaceable.
However, that isn't to say a digital medical service is totally out of the question. Telemedicine has gone from a niche offering to an absolutely necessary feature in recent months, and new business models that piggyback off of digitally delivered service are popping up. Enter Livongo Health.
The company offers a data-driven coaching and wellness program delivered in a virtual format, helping people with diabetes and hypertension manage their health. The stock has already exploded over 300% higher this year, but Livongo is only just beginning to tap into the huge opportunity it has. Millions of people worldwide could benefit from the platform, and there are many other health disorders that could be addressed by Livongo in the coming years. Illustrating that point, management had forecast revenue would increase no less than 70% for full-year 2020. That might have been very conservative. Preliminary second-quarter revenue got a massive upgrade to $86 million to $87 million (up from previous guidance of $73 million to $75 million).
Clearly, Livongo is on to something great. Granted, greatness is already well-baked into share prices at the moment. Even after accounting for a doubling in revenue in the next year, the stock trades for 20.5 times forward price to sales. It's a rich valuation, but the company has ample cash to keep the pedal to the metal. Cash and short-term investments were $368 million at the end of March, and another $475 million was raised via a convertible debt offering subsequent to the end of the first quarter of 2020. This could wind up being a very large digital healthcare business in a decade's time.
2. Universal Display: 4K for the masses
Ultra-high-definition screens have quickly found their way into high-end smartphones and smartwatches in the last few years, but those displays are small. When it comes to square footage, the vast majority of screens produced each year are still legacy LCD, and many of those are lower-definition HD versus the latest and greatest ultra-HD 4K.
But the trend toward better viewing experience is picking up steam, and Universal Display is helping. The company is a patent holder on organic light-emitting diode (OLED) tech and seller of basic materials used in the manufacture of OLED panels. OLED musters a mid-single-digit percentage of global display market share, but Universal thinks manufacturing capacity will double in the next year-and-a-half. That doesn't mean OLED screen sales will also double, but higher manufacturing capacity does mean better scale and cheaper prices -- which in turn could lead to faster consumer adoption in large panel applications like laptops, PCs, and TVs.
A combination of more panel makers using its tech paired with more material sales for large displays could mean lots of upside for Universal stock. Plus, many households are confined to home more frequently these days. A new device upgrade cycle has begun, and many of those upgrades include 4K screens. To hasten the adoption of OLED, Universal is also in the early innings of selling its new manufacturing process, organic vapor jet printing, an efficient new process for the making of large screens.
This is another high-flying stock, currently trading for 50 times trailing 12-month free cash flow (revenue less cash operating and capital expenses). However, the potential for double-digit percentage revenue growth is there, and this is a highly profitable outfit. Universal's free cash flow margin was 33% over the last year, and had $640 million in cash and equivalents and zero debt on its balance sheet at the end of March. With new manufacturing tech coming online and the company's partners starting to switch over from LCD en masse, this stock is worth owning over the next few years.
3. StoneCo: Brazil's war on cash is raging
South America's largest economy is reeling from the effects of COVID-19. The Central Bank of Brazil said economic activity shrank 14% from a year ago in May. However, much like the rest of the world, while in-person business transactions have shrunk dramatically, digital is picking up the slack. And that is playing in favor of Brazilian fintech and digital payments platform StoneCo.
The company revealed it handled 51% of Brazil's e-commerce transactions in Q1 2020. It's the dominant force to be reckoned with in the country on the cashless payments front, but e-commerce is still just a mid-single-digit percentage of total retail spending. That's changing fast, though. StoneCo isn't just benefiting from the rapid transition to online shopping, it's helping nurture the movement by providing payment acceptance and other e-commerce management tools to merchants. And after a brief dip in late March and early April, the company reported its transaction volume was growing above 20% year over year in May.
As if digital payments weren't enough, the company has also started offering credit services to merchants operating on its platform. It introduces new potential risk if those merchants start to default on loans, but Stone's tech helps it vet who needs some help and checks the ability of the customer to make payments based on the transaction history Stone already has. That kind of real-time operational activity data is an advantage most banks don't have, and it could help Stone maintain its massive momentum in the coming years.
As with the other two companies on this list, Stone's valuation is well into premium territory. Shares currently go for 18 times trailing 12-month sales. However, given the big opportunity and pole position in propelling Brazil into the digital age -- as well as an adjusted earnings profit margin of 23% in Q1 2020 -- this technology stock has huge potential.