Stocks that soared in the pandemic

COVID-19 wreaked havoc on the global economy, shuttered businesses, and shattered lives, but it also rewarded companies whose products and services helped humanity navigate a life-altering health crisis. Through their innovative solutions and initiatives these companies helped individuals and large enterprises remain healthy, productive, connected, and creative. The performance of these companies’ stocks during one of the toughest years in human history is a testament to the strength of their businesses, differentiated offerings and their nimble business models.

Returns of some of the best-performing stocks in 2020 ranged between 200 per cent and 700 per cent, outpacing the healthy but relatively humble 16 per cent returns for the S&P 500 and about 4 per cent for S&P/TSX Composite Index, as of 31 December 2020. Thus, it is reasonable to assume that this performance will roll over into 2021 as their innovative products will continue to disrupt industries and enjoy widespread adoption in the post-pandemic world.

The following players are working on the cutting edge of remote working, mobility, and e-commerce. At least in the short- to medium-term, they are expected to remain market leaders in their fields, benefit from growing demand for their offerings, and generate healthy revenue. However, given their stocks’ currently inflated valuations, investors may want to wait for meaningful pullbacks to create attractive entry points and some margin of safety.

Source: Morningstar Direct

Shopify

Canadian e-commerce giant, Shopify offers an online platform primarily to small and midsize businesses (SMBs). The firm’s two business segments include subscription solutions (43 per cent of 2018 revenue) and merchant solutions (57 per cent of 2018 revenue). The subscription solutions segment allows merchants to conduct e-commerce across several platforms, including the company’s website, physical stores, pop-up stores, kiosks, social networks (Facebook), and Amazon. Merchant solutions are add-on products for the platform that facilitate e-commerce and comprise Shopify Payments, Shopify Shipping, and Shopify Capital.

The company strives to be a one-stop shop for small retail businesses, especially those that are e-commerce primarily. “Shopify’s rapid growth since its 2015 initial public offering underscores a nascent software niche that is rapidly growing and demonstrates a winning solution,” says a Morningstar equity report, pointing out that the company is well positioned for “robust top-line growth benefiting from e-commerce trends over the next several years.”

Although Shopify’s customer base spans from one-person startups to some of the world’s largest multinational enterprises, it primarily caters to SMBs. “Our research suggests Shopify is the leading platform for SMBs, as supported by the largest number of merchants of any platform,” says Morningstar equity analyst Dan Romanoff.

Shopify boats over one-million merchants on its platform, with more than 5,000 Shopify Plus customers. “More merchants and high attach rates from add-on features like Payments, SFN, and Shipping should continue to drive strong revenue growth over the medium term,” says Romanoff, who pegs the stock’s fair value at US$657.

Tesla

Electric cars remain the mainstay for generating revenue as the company benefits from the global pivot to green mobility. In 2020 Tesla sold nearly 500,000 EVs a significant jump from 368,000 EVs the year before. The company has been aggressively ramping up its production bases and geographic expansion.The world’s leading electric vehicle company, Tesla makes a range of electric vehicles across multiple price points and sells energy generation and storage products for residential and commercial properties including utilities.

“Tesla’s gigafactories may become terafactories as Tesla seeks to grow its cell capacity to 3 terawatt-hours by 2030 from 0.1 terawatt-hours in 2019,” notes a Morningstar equity report, adding the company’s new factory in Shanghai was already churning out 250,000 Model 3 cars as of fall 2020 and was on pace for another 150,000 units for Model Y online in 2021.

Tesla’s Gigafactory Berlin (Model 3 and Y) is under construction as is a Texas plant for Cybertruck and Y, notes Morningstar sector strategist David Whiston, who puts the stock’s fair value at US$306. In addition, according to several media reports, later this year Tesla could expand its operations to India, the world’s fourth-largest automobile market.

The EV maker recently joined the S&P 500, by far the largest firm by market value ever to join the most widely tracked stock index. Tesla's inclusion is expected to prompt dozens of index funds that track the S&P to purchase tens of billions of dollars of stock, as these funds are designed to track the index as closely as possible.

Afterpay

Afterpay started its buy now, pay later, or BNPL, financing product in calendar 2015, listed on the ASX in May 2016 and merged with Touchcorp (who designed and built Afterpay’s platform software) in June 2017. Its BNPL platform allows consumers to make acquisitions at merchant partners by paying instalments every two weeks.

If consumers pay on time, they transact on Afterpay for free. Afterpay primarily generates revenue from receiving a margin from the merchant. Afterpay pays the merchant the full purchase price immediately on the sale, less this margin. The margin compensates Afterpay for accepting all non-payment risk, including credit risk and fraud by the consumer, and for encouraging consumers to purchase greater dollar values and transact more frequently.

Regulatory scrutiny on the nascent buy now, pay later, or BNPL, industry is set to intensify, says Morningstar analyst Shaun Ler, with ASIC’s recent BNPL industry update highlighting the potential for financial stress among BNPL users.

“This suggests to us that BNPL products are being used as credit, despite marketing themselves as budgeting tools. With ASIC’s findings in line with our BNPL sector thesis, we retain our fair value estimates for no-moat Afterpay at $37.00 per share, and its local rival Zip Co (ASX: Z1P) at $4.50 per share.” 

Zoom Video Communications

Zoom has emerged as one of the biggest beneficiaries of the coronavirus pandemic as millions of consumers turned to the company’s video chat platform as lockdowns and social distancing orders forced them to remain home. A market leader in meeting software, it is disrupting and expanding the US$43 billion video conferencing market. With the fight to contain and eradicate the virus still ongoing, the demand for Zoom’s services is expected to continue to soar.Video software maker, Zoom provides a communications platform that connects people through video, voice, chat, and content sharing. The firm serves companies of all sizes from all industries around the world.

“The company offers a differentiated peer-to-peer technology, complete with proprietary routing technology,” says a Morningstar equity report, noting that Zoom, while lacking a moat, boasts product and technology advantages.

The video-first communications firm’s low-touch e-commerce model lends itself to viral adoption. However, it has also established a direct salesforce to gather and serve larger, more strategic customers. “The company has been adept at adding users, especially during COVID-19-induced lockdowns, and it also has several related products to upsell,” notes Romanoff, who recently raised the stock’s fair value from US$153 to US$176.

Zoom continues to penetrate the market owing to its products’ ease of use and innovative features, a trend that prompted Romanoff to say: “We see a long runway for growth, and we are impressed by management’s ability to over-deliver in terms of both growth and margins.”

DocuSign

As a leader in electronic signatures and contract life cycle management software, the company has enjoyed tremendous demand for its services since the onset of COVID-19 which propelled the remote working trend. The company has a long runway for growth through viral adoption of new and untapped opportunities, says a Morningstar equity report, adding that “we also see existing customers adopting more use cases and expanding seats over time, and also moving to the Agreement Cloud platform.

”Electronic signature software company DocuSign offers the Agreement Cloud, a broad cloud-based software suite that enables users to automate the agreement process and provide legally binding e-signatures from digital devices. The firm’s vision is to modernize the contracting process by taking it from a disjointed and paper-based manual steps to an automated digital and collaborative system.

While DocuSign has mastered the "sign here" step of the process, there’s more to the company than just e-signatures. Its Agreement Cloud platform includes tools to help users prepare contracts using intuitive drag and drop forms, negotiate, e-sign using a variety of enhanced security and identification means, automate agreement workflows for satisfying contract elements post-execution, allow for payment collections, and centralize account management.

Near-term benefits of ongoing lockdowns, more sustainable growth, and a rapidly improving margin profile have prompted Romanoff to significantly raise the stock’s fair value from US$112 to US$152, although he still sees shares as trading at a premium.

 See also Morningstar Guide to International Investing