2020 is finally over and it has set a very high bar in terms of stock market returns. Personally, I don’t think it’s ever possible to achieve the returns I saw in 2020 ever again since the environment was hopefully a once in a lifetime event in regard to a pandemic that forced the world to accelerate their digital adoption by years and years.
A company like Zoom Video Communications basically had the equivalent of 30+ super bowl commercials (in terms of audience reach) being run 24/7/365 talking about its product and giving it the best free press and marketing a company could ever hope for.
Teladoc is another company that had the perfect environment to demonstrate how valuable and seamless its service was since leaving your home to see the doctor had risks of COVID exposure, not to mention the total convenience of being able to “see a doctor” in the comfort of your home is pretty nice.
Despite the craziness of 2020 which unfortunately is still running into 2021 for at least the next few months, I anticipate there will be permanent shifts in how we communicate, exercise, shop, work and entertain ourselves and I’ve come up with a list of 7 stocks that I think will continue to benefit from COVID’s disruption of the world we used to know.
Disclaimer: None of this should be viewed as personal financial advice. This content is strictly informational and educational. Do your own due diligence before buying any stocks.
Ranked in alphabetical order (Share price and market cap as of January 17, 2021):
1. CrowdStrike ($CRWD)
Share Price: $219.51
TTM Revenue: $761.7 million
Revenue Growth Rate: 85.82% (most recent quarter)
Q4 Revenue Guidance: 65%
TTM Enterprise to Sales (EV/S) Ratio: 62.44
Market Cap: $48.57 billion
CrowdStrike is a cloud-native cybersecurity company that offers endpoint protection to organizations to protect their customers from breaches. They recently got a lot of PR after the SolarWinds hack as more companies seek to improve their cybersecurity. CrowdStrike was able to fend off the SolarWind hackers with their security solution which will likely pay a lot of dividends in the future.
CrowdStrike had a fantastic 2020 where their shares appreciated 324.74%, a lot of which was multiple expansion where their EV/S multiple expanded from 23 to 62 but they also grew revenue rapidly in the mid-80s (and accelerating in the most recent quarter).
I personally think their 60+ TTM EV/S multiple is unlikely to hold throughout the year and will likely compress to the mid-50s as their torrid revenue growth inevitably will slow down due to the law of large numbers. Regardless, they have a ton of things going for them at least business operating wise:
- Incredibly high revenue growth
- 85% YoY in the most recent quarter and ARR was 81%
- Improving operating margins
- Improving 4% to 8% sequentially and with a long-term target of 20%
- Really strong free cash flow margins
- 27% in the most recent quarter
- If they can maintain these strong FCF margins, this should provide an solid floor on their EV/S multiple since Atlassian is a company that has seen their revenue growth slow down but they continue to have really strong FCF margins which enables them to maintain a 25+ EV/S
- Net Revenue Retention rate of 120%+ for the past few quarters which is above industry average
- High gross margins in the mid-70s and improving YoY
CrowdStrike’s market cap is less than $50 B (with TTM revenue only at $760 M) and for a company in an industry with an estimated TAM of $150 B+ and growing at a fast clip, it wouldn’t surprise me if CrowdStrike became a $100+ B company in the next 2-3 years.
2. Etsy ($ETSY)
Share Price: $204.42
TTM Revenue: $1.4 billion
Revenue Growth Rate: 128.02% (most recent quarter)
Q4 Revenue Guidance: 90%
TTM Enterprise to Sales (EV/S) Ratio: 18.40
Market Cap: $25.78 billion
Etsy is an online global marketplace that specializes in unique and creative goods. They don’t sell any of their own products but rather offer a robust platform for sellers and buyers to transact with one another.
When COVID first hit, Etsy’s stock plummeted because a lot of investors mistakenly thought that Etsy was doomed due to their products being more discretionary in nature and given the terrible state of the economy, that business would slow down tremendously. That was probably the case for 1-2 weeks in late March and then things started to really pick up since as we all know, ecommerce was king during COVID.
Etsy is one of my favorite stocks and one that I have owned for many years because I think they have a great business model, a strong management team and an awesome marketing strategy. Their stock has been on fire for the past few years with a 3-year CAGR of 105.67% and last year alone their share price grew 301.60%. Despite their insanely fast growth, their EV/S multiple is still < 20 which is a big reason why I am so incredibly bullish on Etsy. For a company growing revenue at 100%+ in the past 2 quarters and while they will obviously see a material slowdown in the coming quarters as COVID eventually passes (or at least that’s what everyone thinks), it still seems like there is still a lot of room for multiple expansion which generally has the biggest impact on share price appreciation.
Etsy also has a lot of other things going for them fundamentally as a business:
- Strong revenue growth
- 128% YoY revenue growth in the most recent quarter with strong forward guidance
- Active Buyers & Sellers are accelerating in their growth in their platform
- Active Sellers increased 42% YoY in the most recent quarter, that’s up from 34.6% in Q2
- Active Buyers increased 55% YoY in the most recent quarter, that’s up from 41% in Q2
- Increasing Take Rate
- Their take rate has been slowly increasing over the years even despite their acquisition of Reverb which had a lower take rate
- Solid FCF Margins
- Their FCF margin for the most recent quarter was 40.6% which is incredible
- GAAP Profitable rapidly improving EPS
- TTM EPS increased 118% YoY to $1.81
- Etsy Ads is gaining a lot of traction
- Etsy Ads grew 106% YoY and 19% sequentially QoQ
Etsy has a market cap of just $25 B and for a company that is rapidly growing and that got a lot of free press due to their marketplace selling a ton of masks, I think Etsy can potentially double this year or soon after in share price if they continue to build on the momentum they had from last year.
3. DocuSign ($DOCU)
Share Price: $249.28
TTM Revenue: $1.3 billion
Revenue Growth Rate: 53.45% (most recent quarter)
Q4 Revenue Guidance: 48.4%
TTM Enterprise to Sales (EV/S) Ratio: 35.92
Market Cap: $46.5 billion
DocuSign is a software company that offers an electronic signature solution and contract lifecycle management (“CLM”) solution for businesses to act on and manage the entire agreement process.
COVID has really accelerated the growth of DocuSign’s business since obviously there wouldn’t be as many physical contracts given the need to stay at home and avoid meeting in-person. DocuSign is the biggest e-signature solution on the market and has significantly more market share than even their biggest competitor, Adobe (which is a huge company).
Even prior to the pandemic, DocuSign was growing at a solid 35-40% clip and with the pandemic that has increased to 45-55% with Q4’s guidance at 48%. While their e-signature solution has definitely taken off, especially in the real estate market, what’s interesting is that DocuSign also offers a Contract Lifecycle Management product that could get some significant enterprise company traction in the coming years (COVID kinda put a damper in the ramp up of their CLM product). They also acquired an online notarization company called Liveoak Technologies about 6 months ago that should help fully round out DocuSign’s business as your goto source for all things contract and agreement related.
I really like DocuSign this year because their multiple hasn’t expanded to absurd levels yet which again means multiple expansion opportunities on top of their strong revenue growth.
Here’s some business fundamentals that make me incredibly bullish about this company:
- Accelerating revenue growth
- In their most recent quarter, DocuSign grew 53% YoY which is up from 45% YoY in Q2. Their revenue has been slowly accelerating since Q1 of this year and if they beat their revenue guidance this quarter like they usually do, then they may have four consecutive quarters of accelerating revenue growth which is huge.
- Improving FCF Margins
- DocuSign’s FCF margins have been consistently in the 10%+ range this year which is up from the mid-single digit margins they had last year
- Total Customers and Enterprise Customers are growing rapidly
- Total customers grew 46% YoY which is up a lot from their prior sub 40% growth in prior quarters
- Their enterprise customers are up 64% YoY which is a huge acceleration from last year
- Increasing Net Revenue Retention
- They finished Q3 with a NRR of 122% which is their highest NRR in the past 6 quarters
Overall, DocuSign has a lot going for them and even after COVID passes, the way businesses do business from a contract and agreement perspective has definitely changed and there’s no way anyone is going back to physical signatures once they’ve onboarded an e-signature solution. This is why I love SaaS companies, the stickiness and recurring revenue makes them solid and safer investments than companies that need to sell by the widget.
4. Fiverr ($FVRR)
Share Price: $267.13
TTM Revenue: $163.1 million
Revenue Growth Rate: 87.46% (most recent quarter)
Q4 Revenue Guidance: 81.02%
TTM Enterprise to Sales (EV/S) Ratio: 55.72
Market Cap: $9.387 billion
Fiverr is an online marketplace for businesses that enables sellers to sell their services to buyers. These services can be anything from graphic design to SEO to copywriting.
Fiverr has seen a huge run up in their stock price in the past year, growing 730% in 2020! So what caused this tremendous share price appreciation? Accelerating revenue and huge multiple expansion. Their multiple went from a 5 or so at the start of 2020 to 40+ by the end of 2020.
The company has seen even more multiple expansion this year which does give me pause as to how much more Fiverr can appreciate from its current stock price. For such a low market cap stock relative to the others, I do believe anything is possible and the fact that Fiverr is likely going to post a 90%+ revenue growth in Q4 and with their recent QoQ revenue growth trends, I would anticipate Fiverr to be able to grow revenue in the mid-50s in 2021. Assuming their multiple declines from 55 to 45 and normal share dilution from stock based compensation, it’s still a 30%+ grower this year. If they can maintain a 50+ multiple, then there’s a lot more room for share appreciation. I personally think Fiverr will slowly see their multiple drop in the next 12-24 months due to revenue growth slowing (law of large numbers) which may be a headwind for share price appreciation, but for a company still < $10 B in market cap, I think the CAGR over the next few years should still be pretty solid. If they can continue to execute, this is easily a $30-50 B company in the next 3-5 years.
Anyway, moving on to why I like Fiverr, here are some business fundamentals that I really like:
- Accelerating revenue growth
- Fiverr is growing revenue at an incredible clip and I wouldn’t be surprised if they surprised Wall Street analysts with a Q4 revenue growth north of 100%. While it’s unlikely, it’s definitely possible. Either way, they have been accelerating their revenue from the low-40%’s to the 80%+ with guidance of 81% in Q4 which they should beat easily.
- Accelerating active buyer growth and spend per buyer
- Active buyers have accelerated in the past 7 quarters with Q3 active buyers growing 37.2% to 3.11 million. This is great news for Fiverr combined with increasing spend per buyer in the high teens means that Fiverr should continue to post solid revenue growth in the coming quarters.
- Moving up-market
- Fiverr’s share of customers who spent > $500 has increased to 57% of total revenue. When it comes to marketplaces, it’s the whales that really make your marketplace something special.
- Improving Take Rate
- As with any marketplace, you want to ensure your take rate is growing or holding steady. Fiverr has seen their take rate move into the mid-high 20s in 2020, finishing at 27% in the most recent quarter. This is great when you combine it with the huge GMV growth Fiverr is seeing given their active buyers and spend per buyer growth.
- Increasing Gross Margins
- In the last two quarters, Fiverr has seen their gross margin increase from 80.8% last year to 84.4%, that’s a 360 basis improvement which is pretty fantastic for a growing company.
On top of solid business fundamentals, Fiverr also has a great marketing strategy, awesome user experience, solid glassdoor reviews and happens to be servicing the gig economy which is only getting bigger every year. The pandemic most likely fueled the gig economy even more and Fiverr is perfectly positioned to grab market share as more people move to freelancer type roles.
5. Peloton Interactive ($PTON)
Share Price: $157.81
TTM Revenue: $2.4 billion
Revenue Growth Rate: 227.67% (most recent quarter)
Q4 Revenue Guidance: 114.5%
TTM Enterprise to Sales (EV/S) Ratio: 18.99
Market Cap: $46.16 billion
Peloton Interactive is a company that offers connected fitness products to its users such as their Peloton bike or treadmill where users can then participate in on-demand live fitness classes. The bike and treadmill are fairly pricey at $2,000 and the monthly subscription fees to their on-demand classes are $39.99/month. So basically, Peloton is a hardware and SaaS play.
When the global pandemic resulted in gyms all around the world being shut down to stop the spread of COVID, Peloton all of a sudden became a household name and demand skyrocketed for their bikes and treadmills. Even through the most recent quarter, Peloton still said that they are still experiencing supply chain issues and can’t get enough of their product shipped on a timely basis. Due to this surge in demand, Peloton’s revenue has skyrocketed. Their stock last year increased by 434% and despite all that, Peloton’s stock in my opinion remains undervalued given their growth and opportunity for multiple expansion. For a company that is experiencing accelerating revenue and such strong demand that there are huge supply constraints, plus huge market leadership in connected fitness, I think Peloton could experience some significant multiple expansion in 2021 as long as they continue to execute well.
From a business fundamentals perspective, there is a lot to like:
- Accelerating revenue
- Revenue has grown rapidly ever since COVID started, with its last quarter with revenue growth of 228%. Guidance for next quarter is 115% but I anticipate that it will be closer to 125% YoY and revenue will accelerate sequentially for the 3rd quarter in a row.
- Digital subscriptions is growing like crazy
- In its most recent quarter, Peloton saw digital subscriptions grow 382% YoY which is up from 210% YoY growth the previous quarter. I expect that Peloton will continue to build on their digital subscription business as Peloton is establishing itself as a solid brand.
- Strong operating cash flow
- Operating cash flow grew to $312 M in the most recent quarter, this is up from -$76 M last year. Peloton has posted 4 consecutive quarters of positive operating cash flow with healthy operating cash flow margins in the 20%+ range in the most two recent quarters.
- Low connected fitness churn
- Peloton’s overall churn rate remains below 1% which makes sense given their huge community and fun instructors.
Peloton still has a ton of runway in connected fitness products. They also have the opportunity to introduce new fitness products. Rumor has it that they will be introducing a Rowing Machine sometime in the next few years which would compete against Hydrow and NordicTrack. The WSJ also had an article about how Peloton is also selling a lot of apparel given the strength of their brand and could compete with Nike and Lululemon in the future.
There’s a ton of tailwinds for Peloton and I’m pretty confident that Peloton will fix their supply constraint issues and have a successful 2021.
6. Pinterest ($PINS)
Share Price: $69.75
TTM Revenue: $1.4 billion
Revenue Growth Rate: 58.6% (most recent quarter)
Q4 Revenue Guidance: 60%
TTM Enterprise to Sales (EV/S) Ratio: 30.00
Market Cap: $43.11 billion
Pinterest is a social media company that offers a visual discovery platform where hundreds of millions of users can search and find inspiration for the things they love. Since their IPO in 2019, they’ve really evolved their platform to become better at visual search and to provide better ad formats that do especially well for ecommerce retailers.
Pinterest like many companies that derive their revenue from advertising was materially impacted in Q2 last year when all advertising just came to a halt due to the pandemic. They rebounded in Q3 solidly which resulted in their stock appreciating like crazy and their Q4 guidance was even better at 60%. The fact that they provided guidance of 60% is incredibly impressive because generally they give themselves a little bit of room to beat, so it’s quite possible revenue could be closer to 70% which would be incredible. Their multiple at 30 is actually pretty reasonable for a company growing at 50%+ and if they beat in Q4 with solid guidance, I could expect some significant multiple expansion.
The bull thesis on Pinterest is their continued strong MAU growth and the fact that their Average Revenue Per User (ARPU) is just getting started. They finished their most recent quarter with an ARPU of $1.03 in total, with US ARPU at $3.85 and International ARPU at $0.21. Compare these ARPU numbers to Facebook’s $7.89 worldwide ARPU in its most recent quarter, there is still a lot of room to grow. Facebook’s US ARPU is nearly $40!!!!
Fundamentally, Pinterest is a strong business:
- MAU growth is strong
- Q3’s MAU growth was 37% YoY and has been in the high 30’s since the start of the pandemic. There are currently 442 million global MAUs. US MAUs also grew nearly 13% YoY, but the big kicker was the 46% growth that international saw.
- ARPU growth looks very promising
- ARPU for both US and International have been incredibly strong the past few years and its most recent quarter. International ARPU increased 62% YoY and is still only $0.21. US ARPU grew 31% and now sits at $3.85.
- Adjusted EBITDA margin is improving
- Pinterest is still very unprofitable but their Adjusted EBITDA margins are improving and Pinterest could potentially see a a very strong year in adjusted EBITDA margin.
Pinterest has a ton of opportunity to continue to improve their ad products and to continue to benefit from the big shift to ecommerce. Their partnership with Shopify will only help fuel their growth especially in the small business space. Plus, I don’t see their MAUs and ARPU slowing down any time soon, which means Pinterest still has a long runway. I can easily see this company becoming a $200 B business in the next 3-5 years.
7. Zoom Video Communications ($ZM)
Share Price: $384.53
TTM Revenue: $1.95 billion
Revenue Growth Rate: 366.5% (most recent quarter)
Q4 Revenue Guidance: 331.4%
TTM Enterprise to Sales (EV/S) Ratio: 56.43
Market Cap: $112.24 billion
Zoom Video Communications is a video-first unified communications platform that is well known for its easy-to-use video conferencing software. The pandemic greatly accelerated Zoom’s revenue growth in 2020 where their stock price increased by 396%.
Ever since the vaccine was first announced in mid-November, Zoom’s stock has taken a beating. The stock had risen as high as $568 before crashing 40%+ to the low $330’s before spiking back up after there was a major press release announcement sharing how Zoom had just sold its 1 millionth Zoom Phone seat.
Given the fact that Zoom continues to grow revenue rapidly without any major signs of slowing down, I expect they will have a solid 2021. There are a lot of investors who believe Zoom stock has peaked and that the complete rollout of the vaccine in mid-late Spring 2021 will spell doom for Zoom’s stock. I disagree wholeheartedly.
I believe that the pandemic has permanently changed how businesses do business and how remote work is done. I don’t expect large companies to simply cancel their Zoom subscriptions once everything “returns to normal” since as many people have witnessed, life and business can mostly still go on even in the midst of a global pandemic.
Moreover, Zoom’s own management team has stated that Zoom Phone will become a material growth driver of the business in 2021 and the big press release about the millionth seat being sold is huge since just 3 months ago they had about 500k seats sold.
Zoom’s TTM EV/S is at 56, I think that’s a pretty reasonable multiple given Zoom’s growth rate, but it’s very possible that towards the end of 2021, Zoom’s multiple compresses slightly which may add pressure to overall share price returns. I personally think Zoom will end the year around $600+ which is over 50% growth.
Zoom’s business is firing on all cylinders:
- Accelerating revenue growth
- Obviously the pandemic has enabled Zoom to capture a lot more demand and they’ve accelerated their revenue growth from mid-70s to 367% in their most recent quarter.
- High FCF Margins
- Zoom’s FCF margins are insane and while I fully expect their FCF margins to shrink from the current 50% it finished Q3 with, I do believe they can maintain FCF margins north of 20% in the long run which should help with providing a floor on their overall multiple.
- Improving GAAP EPS Profitability
- EPS growth has grown quickly with TTM EPS of $1.43 and this should increase significantly with Q4’s release. Most technology stocks are not valued based off PE ratios, but in Zoom’s case, it’s possible that PE can provide a floor for their valuation as they continue to scale their enterprise business.
- Customers > $100k growth is accelerating
- Zoom grew their > 100k customers by 136% YoY in their most recent quarter and QoQ its revenue growth has accelerated from 17.17% to 30.47%.
In Zoom’s upcoming earnings release, I will be very curious where overall revenue finishes and how it looks from a sequential QoQ perspective. In addition, I will be monitoring their Zoom Phone sales execution since that could provide a big boost for Zoom’s enterprise customers.
I think Zoom is a fantastic business and there’s no reason to not believe that they can hit $250 B in valuation in the next few years.
You made it to the end! Well, I figure if you made it to the end, I can at the very least provide you with my best estimates as to where the stocks will finish 2021 from January 15, 2021’s market close price:
- CrowdStrike – $330 (+50%)
- Etsy – $355 (+74%)
- DocuSign – $350 (+40%)
- Fiverr – $350 (+31%)
- Peloton Interactive – $335 (+112%)
- Pinterest – $110 (+57%)
- Zoom Video Communications – $650 (+69%)