The market can’t seem to make up its mind on how to value tech stocks as the world emerges from the worst of the coronavirus pandemic. The tech-heavy Nasdaq Composite index briefly entered into correction territory (meaning it fell at least 10% from its high), but it’s since seen substantial recovery, and many investors are probably wondering what comes next.
With that in mind, we asked three Motley Fool contributors to profile a tech stock that looks poised for big wins in the post-pandemic world. Read on to see why they think Zynga (NASDAQ:ZNGA), Etsy (NASDAQ:ETSY), and Wix.com (NASDAQ:WIX) are on track to deliver fantastic returns.
Game over? Not even close
Keith Noonan (Zynga): Video game stocks got a big boost amid the coronavirus pandemic. Shelter-in-place and social-distancing initiatives meant that people increasingly turned to digital channels for fun and socialization, and Zynga’s video game catalog enjoyed record levels of engagement during the unprecedented conditions.
A return to a way of life that looks closer to normal could mean that people spend less time on video games, and it’s reasonable to think that Zynga’s organic growth will be slower in the near term. However, the company looks well positioned to thrive over the long term, and the stock should be able to weather tech volatility and deliver big returns.
The market for video games has never been stronger, and more people are taking up interactive entertainment as a hobby every day. What’s more, the confluence of graphics processing and artificial intelligence technologies at the core of today’s games could help companies branch into applications outside of the medium. Video game companies have the potential to use these resources to tap into tech trends including augmented reality and e-commerce, and this characteristic is likely a factor in why the acquisitions market for gaming companies has been so hot as of late.
Microsoft‘s $7.5 billion acquisition of ZeniMax and Electronic Arts‘ pending $2.4 billion purchase of Glu Mobile are just a couple of the big buyouts shaping the industry in recent years, and Zynga’s strong position in the mobile games market means it has a good shot of being acquired at a premium. That should help establish a pricing floor on the stock even if the tech sector continues to be racked by volatility, but Zynga doesn’t need a buyout to deliver wins for shareholders.
Etsy suffers from a false narrative
Jamal Carnette (Etsy): The pandemic has been good for Etsy’s stock. Shares of the craft-based e-commerce platform are up nearly 400% in the last year, well outpacing the market return. Like most growth stocks, Etsy has struggled over the last month as a combination of rising rates and a rotation away from stay-at-home stocks to reopening stocks have halted its surge.
The risk for Etsy is whether it can continue growing at a rapid clip considering it trades at nearly 17.5 times revenue. The bearish narrative is that the pandemic created a rush of first-time buyers looking for masks and home-based crafts but they will opt for in-person shopping once the lockdowns are lifted, Etsy’s sales will suffer, and the stock will plummet.
It’s early, but the signs suggest this isn’t what’s happening. Etsy is doing a good job with buyer engagement: In 2020, 48% of active buyers were repeat buyers, an increase from the prior year. Even better, habitual buyers — defined as users making six or more purchases and spending more than $200 — increased 157% from the prior year. While it’s likely there will be a return to in-store shopping, Etsy’s unique homemade and craft product selection will continue to win share versus mass retailers.
The “reopening versus stay-at-home” stock phenomenon will be soon forgotten. Ignore these temporary narratives and buy stocks with long-term growth opportunities. Investors should put Etsy on their watch lists and pay attention to any dips.
The website builder
Joe Tenebruso (Wix.com): The COVID-19 crisis made clear just how vital it is for businesses to have a strong online presence. This will remain the case after the pandemic ends, as consumers continue to shift their research and purchases of products and services online.
Wix.com is helping to meet this growing need for online site creation tools. It provides a host of website-building tools for free. Small businesses, in turn, are flocking to its platform. Wix’s registered users jumped 19% to 196.7 million in 2020. “The demand for a web presence is higher than ever before,” CFO Lior Shemesh said in the company’s fourth-quarter earnings release.
Many of these users are choosing to upgrade to Wix’s premium services, such as custom domains, add-free sites, additional storage space, and greater video capabilities. Wix added 185,000 net premium subscriptions in the fourth quarter, which brought its total subscriber base to 5.5 million. Wix’s full-year revenue, in turn, surged 30% to $988.8 million in 2020.
Better still, Wix generates copious amounts of cash flow. Its operating and free cash flow checked in at $148 million and $129.2 million, respectively, last year.
Looking ahead, CEO Avishai Abrahami has a bold vision for the future. “Wix will now strive to become the main engine of the internet, democratizing access and providing a place where the majority of people will build their web presence,” Abrahami said. “My goal and belief is that at this rate of growth, in the next five to seven years, 50% of anything new built on the internet will be done on Wix.”
If Abrahami is even close to being correct — and Wix’s impressive growth suggests he just might be — the increasingly popular website development platform could deliver market-crushing returns to its investors.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.