There's a narrative out there that a vaccine might be "bad news" for technology stocks. Why? Well, with people staying at home, the pandemic has accelerated digital transformation that allows people to work, educate, and receive medical care remotely. As a result, 2020 has seen tech stocks that serve these digital trends boom, while much of the rest of the market has sunk, with many stocks outside of technology still trading well below their pre-pandemic highs.
Many think that once a vaccine is out, those trends will reverse, and tech stocks will sink while non-tech stocks will boom; however, the following technology names should actually do better than you think, even when a vaccine becomes widely available. So, if you want to put money into stocks that still benefit from long-term digital trends but are afraid many "stay-at-home" tech stocks are overstretched, the following tech names should be high up on your buy list.
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Alphabet
Search giant Alphabet (GOOG +1.44%) (GOOGL +1.63%) has had somewhat worse results in 2020 than other digital advertising-based stocks, including booming social media stocks. You can chalk that up to Alphabet's higher proportion of travel and local service-related advertising it hosts on its dominant search platform. Alphabet actually saw its first-ever revenue decline in the second quarter, when sales fell by 2% on the back of a 9.8% decline in search advertising.
Fortunately for Alphabet, it has a diverse enough "stay-at-home" business portfolio across cloud, YouTube, its app store and chromebook hardware to sustain the company through the initial phases of the pandemic. Another positive is that during the revenue swoon, management stepped up to almost double the amount of share repurchases through the first three quarters of 2020 relative to last year. Look for Alphabet's "stay-at-home" businesses to continue growing even after the pandemic is over.
Meanwhile, Alphabet's core advertising-based business should get a big jolt once the travel industry and local businesses are back firing on all cylinders and advertising on Google search. Investors already saw a strong recovery beginning to happen in the third quarter, with revenue accelerating to a 14% overall gain as search ads bounced back to positive territory. Just imagine what could happen once we get a full economic recovery.
Sabre
Speaking of Alphabet, one of its notable cloud clients is travel-related tech company Sabre (SABR +4.00%). Sabre's products include its large distribution platform that connects travel suppliers like airlines, hotels, car rental companies, and others to travel agents. Its IT solutions portfolio includes ticketing and reservation software for airlines, and a separate offering includes software-as-a-service used by hotels.
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Sabre hasn't fared too well in 2020, and its stock price, despite a recent bounce, is still less than half its pre-pandemic levels. Last quarter, revenue "improved" to a decline of 72%, and the company is still racking up losses, including over $200 million in cash burn in the third quarter alone.
Once we get a vaccine, however, pent-up travel demand should pick back up, and there will likely be an even higher level of digital booking going on, which should only help Sabre. Furthermore, during the pandemic, the company has made a significant amount of cost cuts, with the goal of reaching $275 million in annual cost savings by 2024.
Some of that will come via the company's recent adoption of Google Cloud Platform, which is saving Sabre from having to run its own data centers. On the recent conference call with analysts, management said that it has reduced its server use by some 30% already in 2020, equating to many millions flowing to its bottom line.
However, Sabre's relationship with Google goes just beyond use of Google cloud. The two companies have teamed up to offer Sabre Travel AI, which uses artificial intelligence to better put the right offers in front of the right customers based on data insights. The first product based on the platform, Sabre Smart Retail Engine, will be launched in 2021 with personalized offers with dynamic pricing on travel seats, baggage offers, and third party products.
Sabre looks like a "tech" company that will be coming out of the pandemic leaner and meaner, and should bounce further once the vaccine is distributed and people are back traveling again.
Micron
Finally, some tech-related businesses still haven't reached their pre-pandemic highs, including several in the hardware segment. One is Micron Technology (MU +3.03%), which, although well off the March lows, is just about back to where it was trading before the pandemic.
Micron is a cyclical company, with its results largely determined by supply and demand for its DRAM and NAND flash products, both of which are near-commodities. Therefore, when the economy fell into recession, Micron's stock price tanked, as fears of a demand decline took hold. However, Micron actually surprised in the calendar second quarter, as aggressive buying from cloud data center customers helped offset weakness in consumer electronics, autos, and others.
Yet after the aggressive buying – in part due to fears of a supply shortage – cloud buyers paused once they had enough inventory, and demand from consumer electronics and autos remained relatively weak. Add in the fact that the Trump Administration hastily banned sales to Huawei in September, Micron's largest customer, and that sent Micron's shares back down again late in the summer.
However, things may be looking up for Micron. Due to the pandemic, DRAM suppliers have been relatively cautious and disciplined with regards to supply growth investments, and the 5G super-cycle, which will need lots more DRAM, is just kicking into gear. Furthermore, Micron has continued to innovate, recently unveiling the NAND industry's first 176-layer chip, launching Micron into technology and cost leadership in the hyper-competitive NAND industry.
The memory industry has to invest in supply growth in anticipation of demand, so when things like a trade war and a pandemic occur, it can cause Micron's results to go a bit haywire. Once a vaccine is distributed, and once we have a, shall we say, less erratic administration in the White House with regards to China, a more predictable demand outlook should benefit all players in the memory sector, Micron included.
