As the economy reopens, investors appear to be see-sawing between cyclical names that will benefit from faster economic growth and technology growth stocks that received accelerated adoption during the pandemic.
Then again, who says you have to choose? Tech stocks Alphabet (GOOG 0.74%) (GOOGL 0.55%), Booking Holdings (BKNG -0.47%) and T-Mobile (TMUS 0.57%) all have business drivers that will also benefit from the reopening. So in buying these long-term winners, you get the best of both worlds.
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Alphabet's auction-based ads should surge with economic growth
Alphabet's financials and stock price have been on a tear recently, but look for the good times to continue as the economy heats up. Before the pandemic, about 12% of Alphabet's search revenue came from the travel sector, so look for travel-related ads to further boost Alphabet's digital ad dominance. And although inflation appears to be a concern for growth stocks like Alphabet, remember that Google search's auction-based process should see price increases along with inflation, as business that raise their own prices will likely pay more for effective search ads.
Alphabet should also benefit from the increased usage of YouTube, which spiked during the pandemic and now reaches more 18- to 49-year-olds than all of linear TV combined. That should stick around as well as more and more people cut the cord on traditional TV and consume content on mobile phones -- a trend that won't be stopping anytime soon.
Finally, the pandemic was a wake-up call for all businesses that haven't yet made a bigger move to cloud computing and remote work. While some office work will return, look for more flexible work-from-anywhere options to stick around post-pandemic. With businesses realizing the need for cloud and video conferencing capabilities, look for Google Cloud Platform and G Suite software tools to continue growing in tandem with better economic growth and spending.
Alphabet is a digital business, but remember, its main businesses in advertising and consumption-based cloud computing are also correlated with economic growth, which should benefit from reopening.
Booking Holdings: A prime beneficiary of the travel rebound
Booking Holdings is a leading global online travel agency (OTA) that helps people find discounts on flights, hotels, rental cars, attractions, and restaurant reservations through its various brands, including Booking.com, KAYAK, priceline, agoda, Rentalcars.com and OpenTable.
The travel industry is still hurting right now, and Booking Holdings' earnings are still in the negative, with a $311 million operating loss last quarter. However, Booking has tons of liquidity, with over $12 billion in cash as of March 31, against a little less than $14 billion in debt. In addition to those cash assets, Booking also has a $3.1 billion stake in Chinese services super-app Meituan-Dianpeng, $525 million in convertible notes in Chinese OTA Trip.com, $400 million of equity in Didi Chuxing (private), the largest ride-hailing service in China, and another $200 million of preferred shares in Grab, a ride-hailing, food delivery, and payments super-app based in Singapore, which may be going public via a SPAC soon.
And travel is beginning to return -- at least in geographies where vaccines have been distributed, such as the U.S., U.K., and Israel. On the first-quarter conference call with analysts, Booking management said its U.S. segment had already experienced positive room night booking growth versus the first quarter of 2019.
While Booking is Europe-centric, with the U.S. making up less than 30% of revenue, as more of the world becomes vaccinated, one would expect results to improve over the course of this year and 2022. On the recent call, management also highlighted two new tech initiatives that should further boost growth: its own in-house payments platform, as well as a "connected trip" feature that should make it more convenient for consumers to book travel across flights, hotels, rental cars, and attractions.
Back in 2019, Booking made just over $5.3 billion in operating income, and today its market cap is around $94.6 billion, or about $90 billion excluding those aforementioned investments in other companies. When factoring in interest and taxes, that equates to around a 20 P/E ratio. But given that Booking is now seeing growth relative to 2019 in geographies where vaccination rates are high, earnings should surpass 2019 figures in 2022 and beyond, making Booking a reasonably priced way to play the rebound in travel.
T-Mobile: More vendor switching should lead to more net additions
You may not think of leading 5G wireless service provider T-Mobile as a "reopening play," but in some ways, it is. Over the past decade, T-Mobile's "Un-carrier" ethos of low prices and customer-friendly policies has continued to take market share in the U.S. telecom industry. So during periods of high switching, T-Mobile tends to win. And that trend should continue in the 5G era, especially now since T-Mobile not only has low prices but also the leading 5G network.
When people were quarantined at home during the pandemic, churn in the industry went down, as most wireless plan switching still occurs in retail stores. But now that a majority of American adults are vaccinated and things are opening back up, look for switching to increase, which should benefit share-takers like T-Mobile, which has continued to lead the industry in wireless net additions this year.
In addition, T-Mobile also offers generous features for international travelers, including free calling in Mexico and Canada, as well as free texting in over 201 countries, along with low-cost international data plans. So, these low-cost travel features should also benefit T-Mobile as customers size up which wireless plans may benefit their travel plans.
While the subscription-based revenue of T-Mobile wasn't disturbed by the pandemic, reopening could lead to even greater share gains for this 5G leader.
