COVID-19 and the response to halt its spread has been a game-changer for many companies. It's still early on, but the mass migration to all things digital that was already underway got a huge shot in the arm and is reshaping society. Since the economic lockdown in late March and early April, I've been trying to uncover small but promising digital companies that could benefit as a result.
The market has rallied over 40% from lows in late March, even though the world is still a mess. I've thus struck a more cautious buying tone for the time being, but if stocks make another pullback (arbitrarily defined as a drop of 10% or more from current prices) this summer or autumn, I'll be jumping in headfirst once again.
1. Baozun: Chinese e-commerce is alive and well
After a nearly 300% surge in share price from the start of 2016 to the end of 2017, Baozun stock has been a wild ride ending almost nowhere ever since. The U.S.-China trade war, decelerating profit growth, and the outbreak of pandemic all took a toll.
But the company has been showing signs of life once again, and the stock has rallied nearly 60% since late March. Baozun partners primarily with large vendors (like Nike, Nintendo, and Burger King parent Restaurant Brands International) to help them with product distribution and online sales management, and integrates with Chinese marketplaces like Alibaba. The company is often compared to its North American peer Shopify.
Though things were sketchy to kick off 2020, e-commerce has proven to be incredibly resilient in the world's most populous country. Baozun's revenue increased by 18% year over year in the first quarter and is forecast to rise another 20% to 23% in the second. Total brand partners grew 20% to reach 239. Indeed, some U.S.-based retailers and manufacturers have been struggling stateside but are reporting that China remains a growth market during the current crisis. That bodes well for Baozun's operations.
I've been following Baozun for a long time, but have never quite gotten around to pulling the trigger on a purchase. It's valued at just $2.5 billion and shares trade for a lowly 2.1 times trailing 12-month sales, a real bargain for a growth company. The discount reflects risks, including possible reheating of the trade war and possible delisting of Chinese stocks from U.S. exchanges, but those look like surmountable challenges and e-commerce remains a massive opportunity in China.
2. American Software: The massive logistics problem
Consumers have been demanding delivery of purchases on their terms for a while now, but the massive switch to e-commerce in recent months has the potential to render established logistics networks for manufacturers and retailers obsolete. Direct-to-consumer shipping demands thus present new challenges, but also big opportunities.
That's where I think American Software could come into play. The company makes supply chain management software (most notably Logility and NGC), and though it has been around for quite some time, it has been making slow but steady progress in the last decade. Shares are up 200% over the last trailing 10-year stretch, but the market cap is only $516 million as of this writing. Though it competes with other planning software outfits like Anaplan and other larger enterprise software firms like Oracle, this tiny firm could have plenty of room to carve out more market share for itself in the years ahead.
American Software has been making a transition to a cloud-based subscription revenue business model, which was primarily responsible for the 6% increase in revenue in fiscal 2020 (the 12 months ended April 30, 2020) to $116 million. However, revenue in the company's fourth quarter (during peak economic lockdown) increased 11% from a year ago, driven by a 53% increase in annual cloud contract value. With many organizations in need of managing inventory for the digital age, there's a good chance its most recent rate of advance could be sustained.
At the end of April, American Software had $94.7 million in cash and equivalents and zero debt. Shares trade for 23 times free cash flow (revenue less cash operating and capital expenses). That's not exactly a screaming deal, but it's more than worth keeping a close eye on as the pandemic continues to reshape the global economy.
3. LiveRamp Holdings: A neutral third party for data
Digital data has been a hot commodity this year, as are privacy concerns surrounding the use of individual consumers' information and purchase habits. My last pick is thus LiveRamp, a new stock I picked up in early July, but would be more than happy to buy more of if the market decides to go haywire again.
LiveRamp acts as a third-party pool of consumer data for a growing list of partner companies and advertisers, from online businesses to brick-and-mortar stores. As it doesn't compete with its partners, it can act as a trusted aggregator of customer information, and it makes data anonymous so consumers' info doesn't get attached to their personal behavior. Like American Software, it too has been making slow (but steady) progress, with a more than 200% share price advance in the last decade. I think the intersection of digital data anonymity and its non-competing ad software make it a compelling service for its customers.
Total revenue increased 33% in fiscal 2020, including a 35% increase in Q4 (quarter ended March 2020). The company said its financial results are being negatively affected by the spread of COVID-19, and it expects first-quarter revenue for its new fiscal year to increase just 7%. The problem is that many physical stores have been forced to close and remain limited in their scope of operation, but at some point, conditions will normalize. In the meantime, LiveRamp continues to add new customers (780 at the end of March, a 17% increase over 2019), and it serves only 22% of the Fortune 500 (the largest businesses in the U.S.) There is plenty of room for expansion here.
LiveRamp has $718 million in cash and equivalents and no debt on its books, putting it in good shape to weather the storm and gear up for a return to high growth as effects of the recession eventually wear off. With a market cap of just $3 billion and shares going for 8.2 times trailing 12-month sales, this technologist is worth doing some extra homework on in preparation for another possible market downturn this year.