During 2020, technology stocks generally soared. Investors rightly recognized the need for digital solutions in a world that was suddenly physically distancing. And indeed, many of these businesses performed well last year. However, 2021 has been a different story so far. Now that people are getting vaccinated, investors see the inevitable end of the pandemic. And because of this, many are selling last year's tech winners and buying so-called "reopening plays" instead.
Across the tech sector, you'll find many stocks down more than 30%, 40%, and even 50% just this year. For these, there's no telling how long it will take them to recover. And, for that matter, there's no way to know if they have further still to fall. Therefore, there's a perceived risk right now with these stocks and many investors are looking for safer options.
For those craving safety, I believe Nasdaq (NDAQ -3.22%), The Walt Disney Company (DIS -1.41%), and Axon Enterprise (AXON 0.91%) are three of the safest stocks on the market, and can be comfortably bought and held today to anchor a long-term portfolio. Here's why.
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Profit in times of calm and volatility
If you're looking for a safe stock, perhaps start with a company that literally owns part of the stock market. Nasdaq operates its namesake stock exchange, one of the two major U.S. exchanges, along with other exchanges internationally. Whether stocks are going up or down, this company profits. Increased stock market volatility leads to increased buying and selling of stocks (trading volume). And trading volume is partly how this company makes money.
But Nasdaq does more than generate revenue from trading volume. It provides corporate services as well. For example, it generates revenue when companies have an initial public offering (IPO) on its exchange. It also provides market data and analytics for institutional investors and more.
Nasdaq is a safe stock because its revenue streams are diverse. The company divides its business into four segments. The biggest segment (market services) only accounted for 40% of revenue in the first quarter of 2021, which isn't that much when considering this is the biggest part of the business. Likewise, its smallest segment (investment intelligence) accounted for 12% of the quarter's revenue, which is still a meaningful contribution. In other words, this business is pretty balanced. A temporary setback in one of these segments can be mitigated by ongoing success in other segments.
Moreover, the business is predictable. Annualized recurring revenue is almost $1.8 billion as of the first quarter, up 21% year over year -- a great growth rate for a mature business like this. The company is highly profitable with over $1 billion in trailing-12-month net income. And it consistently pays a modest but steadily growing dividend. For all of these reasons and more, Nasdaq stock isn't risky for investors today.
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Timeless properties with multiple monetization opportunities
In 2019, Disney generated 38% of its full-year revenue from its business segment that covers parks, experiences, and products. It was also the source of 45% of its operating income that year. But in 2020, revenue for this segment plummeted 37% because of the pandemic, as parks were mostly closed. And the segment also reported an operating loss for the year. Nevertheless, Disney stock is up 22% since the beginning of 2020, thanks to the optionality provided by its intellectual property (IP).
We all know what happened in 2020: Disney had perhaps the greatest launch of a streaming-video subscription service in history. In a little over a year, the company went from zero to over 100 million subscribers on Disney+. This impressive stat stands alone. However, investors should consider why Disney+ was so successful so fast. The simple answer is that the company's IP -- like The Avengers, Star Wars, and yes, even Mickey Mouse -- sells itself. Consumers line up at the door in advance, ready to consume whatever content they can.
I'm not suggesting that Disney doesn't experience financial setbacks -- it did and still does. Through the first two quarters of its fiscal 2021, total revenue is down 18% compared to the same period in 2020. And free cash flow for this period fell from $2.2 billion last year to negative $62 million this year. That's a real financial hit.
I am suggesting that Disney's IP can be monetized in various ways like media, licensing, parks, and more. And it's hard for every part of this business to suffer at the same time. Therefore, the public's love for Disney's IP coupled with the diverse ways it can be monetized makes this a safe stock.
Not to mention, there's upside with Disney stock now. Later this year, Disney parks should be getting back to normal operations. And the company has taken this downtime as an opportunity to make upgrades, which could make the segment even stronger than before.
Police officers using Evidence.com. Image source: Axon Enterprise.
Revenue predictability and visibility
If you want a high degree of certainty when it comes to future revenue streams, then take a look at Axon Enterprise stock. The company sells hardware devices like Tasers and Axon body cameras that are used by law enforcement officers. And it offers software services like file management. Recurring revenue accounts for 73% of total revenue as of the first quarter of 2021, and much of this is on multiyear contracts.
Axon expects revenue of $780 million to $820 million in 2021 and at least $920 million in 2022, good for double-digit growth rates both years. Because of its revenue predictability and visibility, there's no reason for shareholders to doubt this guidance.
But moreover, the reliability of this forecast is great for management. It can systematically execute its business plan, being reasonably certain of where the business will be for the foreseeable future. And if something somehow does go awry, the company always has $674 million in cash (with no debt) to fall back on. Therefore, this sounds like a safe stock all around to me.
To circle back slightly, I consider both Nasdaq and Disney to be safe stocks as well. But keep in mind this measure of safety potentially comes with less upside than some riskier stocks. I believe it's possible they can both beat the market averages over a long holding period, though perhaps not by a wide margin. For the most part, these are large and mature companies, unlikely to report hypergrowth.
Therefore, of these three, I'd pick Axon Enterprise as the one with the best chances of market-beating returns over the next five years. Consider that future contracted revenue -- its backlog -- has increased sequentially every quarter for over three years. Currently, the company has received almost $1.8 billion in orders that haven't been delivered yet. Once it delivers them, then they count as revenue. As long as this backlog continues rising like this, the future keeps shining brighter for Axon. And considering it's down over 30% from its recent high, now might be a great time to buy.
