My colleagues have ably filled the latest edition of Barron’s with comprehensive coverage of the stocks imperiled by coronavirus. Tech stocks faced their own reckoning over the past week. In fact, the S&P Information Technology sector reached correction territory before every other S&P sector except for energy.
But a smaller group of tech stocks have actually been shining since investors started worrying about coronavirus. Analysts at MKM Partners have created a basket of “Stay at Home” stocks that includes Netflix (NFLX), Zoom Video Communications (ZM), email replacement service Slack Technologies (WORK), and Peloton Interactive (PTON), the spin bike company. The at-home basket is outperforming the S&P 500 (.SPX) by eight percentage points since coronavirus emerged as a threat in mid-January.
Tech companies have come under fair and overdue criticism in the past year. But we could get a reminder of tech’s benefits in coming weeks, if U.S. workers and students are forced to ride out the virus threat from their homes.
Increasingly, most corporate work can be done from home, with few drawbacks. The Barron’s newsroom uses Slack to stay in touch minute by minute and Google Hangouts to hold video meetings with reporters across the country. Our staff meetings could be carried out over Hangouts without anyone physically present in the office. We have a good remote strategy in place. Coronavirus could force companies across the country to hone their own plans in the coming weeks.
Some experts suggest the virus may pull forward a trend that was going to happen anyway: “We could see a longer-term acceleration in enabling information worker productivity outside the traditional office environment,” Citi Research analyst Walter Pritchard wrote on Thursday.
David Nelson, chief strategist at Belpointe Asset Management, says the outbreak may force companies to rethink the way they do business. “I know a lot of companies that have a lot of employees out on the road,” he says. “Frankly, they don’t need to be on the road that much, as a lot of what they do doesn’t require an in-person meeting.”
Late this week, Amazon.com (AMZN) told its employees to avoid all nonessential travel for now, including within the U.S. Much of that travel could be replaced by video calls.
Nelson expects more companies to ask their employees to work from home in the coming weeks. The market has already discounted some of the potential behavioral changes. Zoom Video shares have risen 47% over the past month and are now trading at nearly 40 times forward sales. That may be a bit too high to chase, but other workforce collaboration tools should do just as well.
One company that should thrive is Okta (OKTA), a leader in employee-authentication cloud software. The company’s offering allows employees to use corporate applications on-site and remotely. Its service becomes more critical as more employees work from home. Okta shares trade at an elevated but slightly less lofty 21 times forward revenue.
In September, this column wrote positively on Slack. The company’s communications tools become even more important if workers are spread across multiple locations. We still like the company’s prospects in a more difficult environment.
If employees are forced to stay at home more, it’s likely to also affect how consumers spend their leisure time. Consumers could avoid public gathering spaces and activities—from movie theaters to concerts to gyms. That leaves more time for them to binge on video offerings through Netflix and Roku (ROKU), whose stocks are easily outperforming the market in the past week.
“Roku is a reasonably defensive investment in a world where Covid-19 spreads in the U.S. in a more meaningful way during 2020,” Needham analyst Laura Martin wrote Tuesday. Roku’s advertising revenue should benefit from a public that’s stuck at home in front of the TV.
One stay-at-home beneficiary that investors have yet to bid up is the videogame industry. Activision Blizzard (ATVI), Electronic Arts (EA), and Take-Two Interactive Software (TTWO) were all down substantially this past week despite their clear stay-at-home bias.
Baird analyst Colin Sebastian believes all three will do well from “prolonged cocooning.” It’s also “worth noting that interactive entertainment can be countercyclical, as a relatively inexpensive form of entertainment versus activities such as travel, dining, and movies,” he wrote on Thursday.
The industry has an attractive product cycle ahead with new consoles from Sony (SNE) and Microsoft (MSFT) slated to launch later this year. Jefferies analyst Alex Giaimo met with most of the major game publishers this past week and said “none of the companies expressed a short-term business concern from the recent coronavirus issues.”
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