The stock market experienced one of its steepest declines less than five months ago. Many stocks have since recovered and are putting up impressive gains, but there’s no guarantee that this recent rally will continue. The U.S. unemployment rate is still above 10%, state and local governments are struggling financially, major businesses continue to lay off workers, and economies around the world are suffering from the effects of the coronavirus pandemic.
Suffice it to say, all of this economic uncertainty could easily push the market back down again. If and when this happens, investors should have a shortlist of stocks ready to snatch up at a potential discount. Three Motley Fool contributors have highlighted a few companies that should make the cut. Read on to find out why Shopify (NYSE: SHOP), Apple (NASDAQ: AAPL), and Microsoft (NASDAQ: MSFT) need to be on your list of tech stocks to buy if the market crashes.
Building an on-ramp to bring business online
Brian Withers (Shopify): The long-term trend of e-commerce has gotten a coronavirus boost as many consumers have turned to online shopping instead of taking that trip to the local store. This change in consumer behavior has caused many businesses to accelerate their plans for building or expanding their presence online, and Shopify is perfectly suited to meet this need. Its platform has been built from the ground up to make it easy for entrepreneurs to enterprises to build and run their online platforms.
Shopify has seen tremendous growth. Over the last three fiscal years, its top line has increased at a 59% compound annual growth rate. As the platform has gotten bigger, this growth inevitably slowed down, from 73% in 2017 to 47% in 2019, but the coronavirus has changed that trajectory. In the second quarter, the platform saw an amazing boost in merchant sales of 119%, which drove revenue up a jaw-dropping 97%.
|Metric||2017||2018||2019||Q1 2020||Q2 2020|
|Revenue||$673 million||$1,073 million||$1,578 million||$470 million||$714 million|
|Revenue growth (YOY)||73%||59%||47%||47%||97%|
Shopify breaks down its revenue into two segments: subscription solutions and merchant solutions. Its subscription revenue comes from the monthly fees merchants pay to use the platform, ranging from its Shopify Lite subscription at $9 per month to its high-end Shopify Plus service for enterprises and large sellers starting at $2,000 per month. This segment’s revenue grew “only” 21% year over year last quarter, mainly driven by new merchants who joined the platform. Its merchant solutions segment is made up of transaction-based fees, where it takes a small cut of payments, shipping services, or sales with its point-of-sale credit-card reader. It’s this segment where the company saw the biggest gains in the quarter.
In the second quarter, its merchant solutions revenue grew an astounding 148% driven by the huge growth in gross merchandise volume (dollar amount of goods sold on the platform). On the earnings call, management indicated that it was the “third quarter in a row of [merchant solutions] acceleration and a growth rate we have not seen since before our IPO.” This impressive result enabled the company to scale its operating costs and post a rare positive operating income.
It seems that Shopify has everything going right. It’s benefiting from years of investing in innovation, attracting new merchants, helping its existing 1 million-plus customers sell more in a challenging economic environment, and sitting on $4 billion in cash and marketable securities (and no debt). But the one thing that may be holding investors back from investing in this high-quality operator is its lofty valuation. Its price-to-sales (PS) ratio is a nosebleed-inducing 57, even higher than some pricey work-from-home software-as-a-service companies like Slack (P/S ratio of 24), Okta (P/S ratio of 39), and DocuSign (P/S ratio of 37).
If the market pulls back and Shopify stock follows along, long-term investors would be smart to buy shares of this exceptional operator that is powering the future of e-commerce.
Apple: A textbook rebound
Danny Vena (Apple): Using the most recent market crash as a template can be instructive when planning for the next one. While nearly all equities were hit to some extent during the rout that occurred between February and March, it’s what has happened in the months since that should help inform investors’ decisions. Additionally, a company with impressive prospects should be at the top of an investor’s buy list when a market crash occurs. Finally, a dividend yield will increase in the wake of a crash and can give investors peace of mind while waiting for the market to rebound. One stock that ticks all those boxes is Apple.
Like many other companies, Apple took it on the chin when the market crash happened early this year, losing more than 30% of its value in just 24 trading days. What happened in the wake of those dark days, however, is informative. Apple has gained more than 52% in 2020, and since hitting its recent bottom in late March, the stock has doubled. This puts Apple in rarefied territory, sporting a market cap of more than $1.9 trillion, making it the most valuable publicly traded company in the U.S.
There’s a number of reasons Apple’s stock came roaring back, and its lofty ascent isn’t likely to stop there. The company has a number of catalysts that will continue to drive its growth going forward. The emphasis on services in recent years is paying off. Revenue from the segment is up 81% since late 2017, with a run rate of more than $52 billion annually, and now represents 19% of Apple’s trailing-12-month revenue.
The company’s pivot to wearables is also paying dividends. Since Apple added the wearables, home, and accessories segment two years ago, revenue has grown by nearly 73%. The business — which includes such standout products AirPods, the Apple Watch, and Beats products — has quickly grown to more than 10% of the company’s total income.
Additionally, with the amount of uncertainty, iPhone sales are currently stalled, but that won’t always be the case. It’s also important to remember that with an estimated 950 million iPhones in use worldwide, and the advent of 5G upon us, many believe there’s a massive upgrade cycle just around the corner, which bodes well for the upcoming release of the iPhone 12.
With those factors as a backdrop, many believe that Apple’s market cap will be closing in on $2.5 trillion, representing 34% upside from today’s price.
Let’s not forget Apple’s dividend. Since the company resumed its payout in 2012, it has increased the dividend by more than 116%. Apple uses less than 25% of its profits to fund the payout, making it one of the safest around.
Given all this evidence, Apple is a textbook stock that you can buy with confidence the next time the market plunges.
Don’t dare overlook this tech stalwart
Chris Neiger (Microsoft): With many technology stocks flying high right now, it can be easy for investors to look to younger, flashier companies to invest in, and miss out on the stability of tech giants like Microsoft. Don’t get me wrong, there’s nothing wrong with investing in technology growth stocks right now, but owning some Microsoft stock if the market crashes is a wise bet. Here’s why.
First, even during the pandemic, Microsoft put up some impressive financial gains. Total revenue increased 13% year over year to $38 billion in the most recent quarter. Additionally, sales from the company’s “more personal computing” segment jumped 14% and its productivity and business segment increased by 6%.
Microsoft has built itself into a stable tech company through its popular software offerings like Office and Windows, but it’s the company’s cloud computing company, Azure, that is driving Microsoft’s latest growth.
Azure sales jumped 47% in the fourth quarter and it continues to be one of the most popular cloud computing infrastructure companies. Azure holds 18% of the cloud-computing market right now, which is behind Amazon‘s 33%, but far ahead of Alphabet subsidiary Google’s 8% market share. What’s great about Azure isn’t just that it takes the No. 2 spot in cloud computing, but that the market isn’t done growing yet. The global cloud computing infrastructure market will grow from $73 billion in 2019 to an estimated $167 billion by 2024.
It’s also worth pointing out that Microsoft has weathered many previous market crashes and economic downturns and has emerged stronger than ever. Even after the company’s share price plunge in March, Microsoft’s stock has bounced back and is up 33% since the beginning of this year. Investors looking for a tech stock that has the financial wherewithal to ride out economic uncertainty and come out ahead would be wise to snatch up some of Microsoft’s shares.