Why invest in stocks (or anything at all) as COVID-19 continues to rage on, and with the looming threat of a global economic recession?

This was one of the thought-provoking questions I got over the last week, and I thought to share my answer with you before delving into the stocks on my watchlist.

The main reason I am still investing in stocks, and why I think you should continue investing in stocks (if you can afford it) is premised on the following.

If we succeed in containing COVID-19, the market will slowly but eventually return to a new normal, and the stocks you buy at a discount today should deliver excellent returns.
If we fail to contain COVID-19 and the world descends into chaos, then, it won’t really matter if you are have invested in stocks or not - we will all be doomed to the same fate.

The question then is this. How confident are you in our ability to overcome COVID-19?

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Now to the stocks on my watchlist

I am currently paying special attention to the industries that have shown resilience during the first few months of COVID-19. I think it is logical to expect them to continue faring better than other industries for as long as the pandemic lasts, and until the world adjusts to a new normal.

So, my focus is currently on pubic companies operating in the areas of;

Streaming
E-Commerce
Cybersecurity

Streaming stocks on my watchlist

This is a no-brainer. Many places are in lockdown and most forms of outdoor entertainment are currently unavailable. On-demand video streaming services provide the freedom to choose the kind of content you want to consume on your own term without the constraints of scheduled programming.

People are at home and they are streaming content than ever before. A new report from Neilson said that American consumers spent an estimated 400 billion minutes streaming content to their televisions over the first three weeks of March this year to mark an 85% increase from the same period in March 2019.

Roku

Roku provides the simplest most innovative way to stream entertainment to TVs. The company makes streaming devices that you can connect to your TV to access nearly all streaming platforms in the same way that a DSTV box gives you access to a long list of traditional TV stations.

In February, Roku reported that it has a total of 36.9 million active accounts to make a quarterly increase of 4.6 million users and an annual increase of 9.8 million users. However, the golden goose here is The Roku Channel, an ad-supported channel that grew to 56 million viewers in 2019.

I’ll encourage you to take some time to dig into the advertising industry, traditional TV ad spend still hovers somewhere around $70 billion every year. As more people cut the cord to stream content on their TVs, much of the TV ad spend will be transferred to streaming platforms.

Note that the Nielson report accounts only for TV streaming and doesn’t account for mobile or computer streaming. Now, what’s the easiest way to stream videos without a SmartTV - you guessed it, Roku. Even if you have a smart TV, Roku simply provides you with a greater lineup of streaming apps than what comes preinstalled on the TV.

What about Netflix?

Netflix is a pacesetter in the SVOD market. In terms of stock performance, Netflix has obviously performed much better than Roku in the YTD (see chart above). Netflix has an edge because it’s service is not bundled with a device. However, Roku has more than doubled Netflix’s gains in the last month.

I have my concerns about Netflix because of the competition from HBO, Hulu, Amazon Prime Video, Walt Disney, and the rest.

Also, Netflix’s user base doesn’t quite translate to revenue - people share passwords. And here’s where Roku shines - users have to purchase a streaming device (revenue stream 1) to use Roku, and then, Roku serves them ads via its free channel (revenue stream 2). Netflix is not necessarily a bad buy in the short to medium terms, but I think Roku is a better long-term play.

Ecommerce stocks on my watchlist

If you read my last post, you probably already know that I have Shopify in my portfolio. However, I am starting to take a second look at some other e-commerce players that I had previously passed over.

As you can see in the chart below, Shopify is still the best performing stock in this sector scoring 54% YTD gains compared to Amazon’s 23% gains.

Amazon

Amazon is now on my watchlist because global economic activities are gradually resuming as the curve starts to flatten in the West. People will start to shop more as the world comes out of the shutdown and economic activities resume; yet, the fear of COVID-19 still lingers; so, people are likely to do more of their shopping online rather than visit brick and mortar stores.

Amazon’s operation is predominantly B2C, it has a resilient supply chain and logistics infrastructure, and it stocks everything from A to Z (fun fact: that’s the subliminal message in the arrow in its logo).

Alibaba

Alibaba’s stock gained more than 54% in 2019; hence, an 8% decline in the first four months of 2020 (see chart above) despite COVID-19 suggests that the stock isn’t necessarily faring too badly.

I think the YTD decline might be an opportunity to buy the stock at a discount, and I’ll be watching to see how fast the global economy goes back into recovery, and how much goodwill Chinese goods still have in the rest of the world.

JD.com

The case of JD.com is similar to the case for Amazon, only that its customers are predominantly in the East rather than Western nations. It is interesting to note that JD.com is up 17% in contrast to Alibaba’s 8% decline in the same period despite having similar Chinese origins. A good explanation for this difference is that JD.com’s operation is predominantly B2C whereas Alibaba’s operation is predominantly B2B.

But Shopify is also B2B 🤔

Yes, Shopify is also B2B but it doesn’t have Chinese origins. Secondly, Shopify caters to a predominantly Western customer base that might have benefited from a rise in eCommerce after many countries went into lockdown mode. Needless to stay, I’m still holding my position here.

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Cybersecurity stocks on my watchlist

COVID-19 has changed the world and we are on track to set the standards for a new “normal”. One of the current themes that will continue into the post-COVID-19 world is that business processes and interactions will become increasingly digitized. Meetings will be held online, contracts will be signed online, and digital identities will increasingly become valid legal representations. The risk, however, is that cybercriminals will be hard at work looking for security flaws to exploit - this is the opportunity for cybersecurity companies.

As more business processes go online, cybersecurity will become more important, and some cybersecurity companies are currently enjoying a boom that should continue beyond COVID-19.

Okta

Okta provides identity and access management SaaS solutions that help companies manage and secure user authentication in modern applications. It also provides developers with toolkits to build identity controls into apps, website web services, and devices.

I consider Okta a solid long-term growth play. The company isn’t yet profitable, but its revenue grew 47% to $586 million in 2019, and its customer base grew by 30% in the same period. It has also integrated its solutions across more than 6,500 cloud applications for almost 8000 customers. Inasmuch as businesses need to protect themselves against data breaches via stolen/false credentials, Okta should continue to be relevant post-COVID-19.

There’s also a huge opportunity for international expansion as only 16% of its 2019 annual revenues came from outside the U.S. whereas as much as 69% of Fortune’s Global 2000 companies (it’s ideal clients) operate from outside the U.S.

Zscaler

Zscaler is on a mission to revolutionize cloud security by empowering organizations to embrace cloud efficiency, intelligence, and agility. The company provides Internet security, web security, firewalls, sandboxing, SSL inspection, antivirus, and vulnerability management to businesses across cloud computing, mobile, and Internet of things.

In the last quarter, it’s revenue increased by 36% year-over-year to $101.3 million to outperform the forecast of $98.9 million.

Zscaler is also a long-term play, it is not yet profitable, and it might hit some bumps in the road in the short term. For instance, in the current quarter, the company expects to post revenue somewhere between $105-107 million and an adjusted EPS of approx. $0.01-0.03 whereas analysts were expecting it to post earnings of $0.04 per share.

However, the current revenue forecast was released in February and Zscaler might end up outperforming those estimates if the stock trajectory in the last two months represents the new realities of its business.

Updates on my portfolio

I sold my position in Virgin Galactic this week - as I said in my last post, surviving COVID-19 has taken precedence of space tourism and there’s no point holding the stock much longer since the speculative hype has died.

I have moved Zoom from being a speculative play to a growth play in my portfolio. The intensity with which the company is being “attacked” by Google and Facebook suggests that it has hit the motherlode.

Facebook Rooms might win the webinars market, maybe Google Meet will get a foothold among startups. But, I think Zoom has a solid chance of retaining its foothold in the Enterprise and Education sectors.

What I’m writing about next

I’m thinking about another speculative play since I sold SPCE and moved ZM into growth. I’m already looking at some stocks in the Healthcare/Biotech sector. Maybe I should write about them next.

Also, many people are reaching out to me about what stocks to trade, and I’m thinking about sharing my thoughts on the differences between trading and investing, and if you should be trading stocks or investing in stocks.

Let me know what would interest you the most in the comments to this post, replies to this email, or on Twitter.

More importantly, don’t get stuck learning about stocks - start investing today.

Here’s wishing you success in your financial journey

Victor Alagbe

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