COVID-19 and the efforts to slow its spread have wreaked havoc on the economy, but not all businesses are faring badly. In fact, some are doing quite well. Though many people have been confined to home more often than before, money is still being spent -- and it's the digital world that is reaping the lion's share of the rewards.
Social distancing orders are still in place, and though shares of Zynga (ZNGA), Limelight Networks (EGIO 9.95%), and Teladoc (TDOC -0.53%) are already up big in 2020 as a result, these three stay-at-home stocks are on my buy list for the month of September.
Mobile gaming a hot staple
In late July, I settled on Zynga as my favorite video game stock. Since then, the company reported solid second-quarter 2020 results, it announced another acquisition, and shares have pulled back over 15% from all-time highs (though the stock is still up 45% so far this year). I'm using the pullback to add to my small position.
First, the quarterly update. Revenue was a record $452 million, up 47% year over year; and free cash flow (revenue less cash operating and capital expenses) was also a record at $142 million. The mobile game company also announced during the quarter it was acquiring Toon Blast and Toy Blast developer Peak for $1.8 billion. And full-year 2020 guidance was updated, with revenue expected to be about 40% higher than 2019 at $2.2 billion. Based on that guidance, shares currently trade for just 4.3 times expected 2020 sales.
Subsequent to Q2 earnings, Zynga said it was making another acquisition: Rollic, responsible for the top two most-downloaded games in the U.S. in Q2 2020, Go Knots 3D and Tangle Master 3D. Rollic reportedly has 65 million monthly active users around the globe. Zynga is spending $168 million for an 80% ownership stake in the small company.
After the two purchases, it makes sense Zynga stock is taking a breather. It parted ways with $900 million in cash for Peak (with the other $900 million being paid for in new stock), and paired with the Rollic takeover, will only have a few hundred million left in liquidity on its balance sheet (there was $1.56 billion in cash and short-term investments at the end of June). Nevertheless, the company is profitable and has grown its leadership in the mobile gaming industry in recent months. Shares look like a long-term bargain at these levels.
Delivering entertainment to homes
Speaking of pullbacks, after initially jumping to fresh highs after its Q2 2020 report, shares of Limelight Networks have tumbled some 30%. It wasn't for lack of positive business traction. The content delivery network (CDN) said revenue jumped 28% to $58.5 million, although free cash flow came in at negative $5.75 million during the quarter.
Limelight has been riding the coattails of the streaming TV industry for almost a year now, helping Disney (DIS 0.33%), Comcast's (CMCSA -0.12%) NBCU Peacock, and AT&T's (T 0.29%) HBO Max get new services online and delivered to homes. As a result, even after the big stumble in the last month, the stock is still up 37% 2020 to-date.
During the Q2 earnings call, management discussed the launch of its new edge computing CDN service, in which data gets moved out of a remote data center and located more closely to the end user to speed up processing times. This new capability significantly increases Limelight's reach in the global CDN space, and it raised $110 million via convertible debt subsequent to the end of the quarter to give it some cash and operating flexibility. Paired with the continual rollout of internet-based TV streaming and a return of live sporting events, there is ample opportunity for this small digital infrastructure outfit to continue growing.
As of this writing, shares trade for just 2.9 times 2020 expected sales. I'll be using the recent pullback to add to my small position in this stay-at-home stock.
Easier than ever to stay home when sick
I've been a happy Teladoc shareholder for a few years now, but 2020 has thus far been the most exciting year yet. Telemedicine (a visit with a healthcare professional via phone or video conference) has been a promising industry, but the pandemic has forever changed things.
Teladoc's total visits in Q2 increased 203% from a year ago to 2.8 million, leading to 85% revenue growth to $241 million. Revenue guidance of at least $980 million for the full-year period (a 77% increase over 2019) and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) of at least $85 million was also issued, and 2021 preliminary guidance of another 30% to 40% revenue growth was also provided. The leader in telemedicine is clearly getting a massive boost from the effects of COVID-19.
But of course the rosy outlook was before Teladoc announced it was merging with high-flying outfit Livongo Health (LVGO). Post-merger, Teladoc shareholders will own 58% of the company to Livongo shareholders' 42%. While the deal (valued at $18.5 billion based on stock prices on Aug. 4) was initially panned by many, I think the long-term implications of the tie-up bode well for owners. The merger brings together two of the fastest-growing companies in healthcare tech, deepening Teladoc's lead in what I think will be a very important industry after the pandemic is beaten.
The resulting company will be a powerhouse with combined revenue of $1.3 billion in 2020 and still growing well into double-digit percentages. The stock is undeniably expensive at well over 20 times 2020 expected revenue (when factoring for the merger). But looking out over the next decade, I think Teladoc will continue its long-term winning ways as healthcare industry virtualization speeds up because of COVID-19.