5 Pandemic Beneficiaries With Long-Term Potential


The pandemic has been a scourge for many companies. The highest profile casualties have clearly been businesses like airlines, hotels, and brick-and-mortar retail establishments which have all experienced fairly steep declines in customers and revenue, though no fault of their own.

However, there has been a select group of businesses that has greatly benefited from the effects of the pandemic. In fact, some of these businesses have seen their stock prices soar, in some cases 2-3x from their pandemic lows. The pandemic has done for these businesses what months of aggressive sales and marketing would no doubt have failed to do.

As the prospect of a vaccine becomes increasingly more likely and as investors turn their minds towards an eventual resumption in regular routines, there are questions around which of the pandemic beneficiaries will continue to see the acceleration of trends that have propelled their businesses during the pandemic versus others who will see demand pull back to pre-pandemic levels.

My own perspective on this is that businesses in the in-home entertainment and communications category will likely see demand fall back to levels that were more consistent with those pre-crisis.

As gyms eventually reopen and people feel safe exercising out of home, I expect a surge in demand that stocks like Peloton (PTON) have seen to fall back to more normal levels. An increasing ability for more people to physically return to work will probably also diminish the usage of services like Zoom (ZM), which has been a major pandemic winner and seen its share price skyrocket. Further, with a resumption of back-to-work routines, I expect that consumers will also have less time for in-home entertainment and that there will likely be some measured attrition in services such as Netflix (NFLX).

However, it’s my belief that the dramatic acceleration in the digitization of the economy that has taken place over the last six months is only going to accelerate and become even more pronounced over the next few years.

I have been particularly interested in 5 long-term secular growth areas of the global economy that have been and will continue to be meaningful beneficiaries. These are growth areas and electronic payments, digital health, digital advertising, cyber security and e-commerce.

Each of these innovation planks in the economy has not only been a major beneficiary due to the pandemic but the wave of adoption that’s been unleashed due to the pandemic will only propel these areas progressively forward.

The Sustainable Growth Marketplace service has been very favorably leveraged to all of these trends. It’s been something that’s been extremely helpful in propelling all of the underlying portfolios in the service to return performance gains of over 60% annualized since the inception of the service one year ago.

So with that, I give you 5 pandemic beneficiaries with long-term potential.

MercadoLibre

E-commerce was one of the most significant beneficiaries of meaningful tailwinds that were seen during the course of the pandemic. Businesses such as Amazon (AMZN) and Alibaba (BABA) had a meaningful influx in demand which bumped up platform growth 50% or more from pre-pandemic levels in Amazon’s case.

The combination of convenience, comfort and broad selection resulted in an acceleration of a shift away from in store retail to online buying that has been well underway for a number of years. One less well-known, more under the radar beneficiaries in this category that is also poised for strong long-term growth is MercadoLibre (MELI).

I have a fairly strong bias towards MercadoLibre, because this is a business that has been a legitimate wealth creator within my Project $1M portfolio since the portfolio’s inception back in 2015, and that initial position is now at 10 bagger. MercadoLibre is both the Amazon and PayPal (NASDAQ:PYPL) of Latin America. The business holds dominant market share for e-commerce and online payments across Brazil, Argentina and other markets in the region.

As Latin America went into lockdown during this period, many consumers in the region got their first taste of digital commerce and almost 30% of consumers in the region went shopping online for the first time. MercadoLibre’s business similarly benefited. During the pandemic, MercadoLibre saw unique active users increase over 42% year-over-year, with underlying revenue growth doubling in constant currency terms.

Source: MELI Q2 ’20 report

While most of these consumers have bought necessities and consumer staples that have small basket sizes, provided their experience with MercadoLibre was positive, it can be expected that consumers will return for repeat purchases, and higher value purchases overtime as their level of discretionary income increases.

There is no question that Latin America has had its bouts with political instability and economic volatility over the years, which have been a major negative for investors looking at the region. However, in spite of this, MercadoLibre has managed to grow quite a strong, respectable business with a dominant moat and sustainable competitive advantages, having over twice the number of visits as its nearest regional competitors. In fact, I believe that the pandemic has provided MercadoLibre with a virtually unassailable lead as the dominant e-commerce player in the region.

Source: Bloomberg.com

With the overall e-commerce penetration in Latin America still very low and with many new consumers having their first experience of e-commerce, MercadoLibre’s future growth prospects look fairly enticing in spite of its share more than doubling since the pandemic lows.

Zscaler

Enterprises were handed a major challenge earlier this year as global workforces suddenly went remote. This presented significant security risks to CIOs, increasing concerns of multiple attack vectors due to employees accessing sensitive corporate data on cloud services from multiple devices in multiple locations.

Being able to clear these various pathways of malware and other threats to enterprise security is precisely where Zscaler (ZS) shines, with its cloud first approach to cyber security. Zscaler functions as something of a traffic cop, sitting between distributed workers and the cloud-based enterprise resources that they wish to access, ensuring that those requests are bona fide and not the work of malicious actors.

Source: Zscaler Q2 Deck

Traditional enterprise security systems are resource-constrained and have not been architected to deal with the many additional pathways and volume of data that come with the explosion that has been seen in cloud services.

As a cloud-native security architecture, Zscaler has been architected with such complexity in mind, meaning that even though there are other incumbent vendors, enterprises are increasingly deploying the Zscaler solution. Zscaler has seen very robust demand through the pandemic, with revenue growth of almost 46% and with billings growth comfortably above 50%, indicative of strong forward-looking enterprise demand.

While risks to Zscaler exist from the competitive actions of incumbent security providers such as Palo Alto Networks (PANW), there seems little to suggest that enterprises are looking elsewhere for solution deployment. With a more distributed workforce looking to access an increasing number of cloud services on an exponential rising number of mobility devices, Zscaler’s pandemic level of interest is something that will only likely continue in the years ahead.

Source: Zscaler Q2 Deck

Livongo Health

The pandemic highlighted just how important digital health is to the well-being of individuals, particularly those with a chronic health condition. Being able to stay on top of conditions such as diabetes or hypertension in the absence of being able to safely attend a medical professional’s office for the monitoring of those conditions was a pain point that was exposed during the pandemic.

Digital health technologies helped maintain continuity of care for patients. Remote consultations and remote monitoring helped patients receive prompt and accurate advice from medical professionals when they otherwise couldn’t be seen in person.

This issue served to play well into the core value proposition that Livongo Health (LVGO) provides, and is one of the reasons I suggested Livongo as part of a high growth alternative to QQQ (QQQ). Livongo provides a digital health platform which is able to take inputs from connected health devices such as glucometers, food diaries and other patient activities and synthesize these via machine learning to provide a status on an individual’s chronic condition. Livongo’s tools help proactively nudge an individual to take positive steps to remediate that condition when necessary and facilitate an interaction with specialized support staff if the condition escalates.

Source: Livongo/Teladoc September ’20 Investor Presentation

Livongo not only helps to manage patient doubts and concerns as to any deterioration of their condition, but the company also removes significant cost from the system in providing preventative care for chronic conditions such as diabetes and hypertension. This ensures that these conditions don’t unexpectedly worsen in the absence of doctor visits and become major crises which may materially impact the quality of life of the patient as well as significantly increase costs to the healthcare system to rectify.

The pandemic has been a major boon to Livongo. The company has had to upgrade its own guidance two times in three months and ultimately delivered revenue growth of more than 125% year over year. As impressive as revenue growth, Livongo also doubled its member growth, which increased 113% year over year in Q2, a healthy indication for demand to come. Investors have been rewarded with the stock price that is up almost 6 times from the pandemic lows.

Source: Livongo/Teladoc September ’20 Investor Presentation

I expect patients, medical health providers and insurance companies have all realized the value of digital health tools in providing a convenient monitoring experience for patients and a low cost way of ensuring continuity of healthcare. Digital health should continue to remain a growth pillar within the economy for years to come, and with Livongo’s expected merger with Teladoc (TDOC), I believe the combined business is well-placed to be a key plank of that growth.

The Trade Desk

Major crises typically provide the best times for businesses to rationalize and redirect spending to areas where they’re able to generate the highest return on investment.

This is certainly true in advertising. The pandemic has accelerated trends away from traditional legacy means of advertising such as television and out of home, which are estimated to have fallen dramatically worldwide and redirected much of this spend towards digital platforms such as digital video.

Source: World Economic Forum

This shift in spend and long-term trend towards digital advertising will only accelerate at the conclusion of the pandemic. While some dollars will obviously come back to legacy areas, I don’t expect a full reversion to the mean. Digital advertising provides more precise control and definition of key audience segments. Further, it’s easier to quantify a return on investment and spend attribution.

The Trade Desk (NASDAQ:TTD) has handsomely benefited from the trend towards digital advertising as well as connected TV viewing which has increased strongly during the pandemic. As consumers continue to spend more time online and as content consumption moves from pre-packaged traditional cable content to OTT subscription, advertisers want to be where the eyeballs are.

The Trade Desk allows advertisers and their agencies to have just such exposure to emerging audience segments in connected audio and connected television as well as in other digital formats and properties online. While the business suffered a little during the pandemic due to a generalized contraction in advertising spend, looking through the near-term fog provides clues into some powerful trends driving the business.

Source: The Trade Desk Q2

The Trade Desk’s connected TV business has grown 40% year over year during the pandemic, with this growth expected to further double through Q3 and into the rest of the year. The shift towards programmatic advertising and better aligning desired advertiser segments and doing so at least cost will continue to propel a fundamental shift in the way that advertising is transacted. While investors have seen and understood this trend and sent the share price of The Trade Desk up almost 3x from pandemic lows, the business is still very much in the early innings of a decade-long trend.

Source: The Trade Desk Q2 ’20 report

Digital advertising will be far more influential and more dominant compared to traditional legacy advertising forms of print, legacy television and out of home over the next decade even once the pandemic has reached a conclusion. It’s for these reasons that I’ve suggested the best is yet to come for The Trade Desk.

Mastercard

The addition of Mastercard (NYSE:MA) in this list may be a slightly puzzling one. When investors look at Mastercard’s results during the pandemic, they may be puzzled to understand why and how the business is a pandemic beneficiary and how it could be poised to benefit as a long-term winner.

It’s true, there have been aspects of the payments network that have suffered during the pandemic. Most notably, its cross-border transactions business has seen major pain over these last few months as international travel volumes have dried up. I do expect it will pick up in due course as travel resumes.

However, for investors who are truly willing to play the long game, there’s been something very interesting that’s been happening across the businesses and economies that Mastercard supports. In the last few months, Mastercard has inflicted considerable damage in the war on cash as virus-weary consumers and merchants have increasingly shunned cash and adopted digital payments as their primary method of payment. This growth in digital payments from cash-shunning consumers and merchants has been accompanied by a rise in e-commerce, which has also been a major tailwind for the business.

Source: Mastercard Investor Deck Q4 2019

Both these trends have dramatically accelerated the expansion in Mastercard’s total addressable market, helping the business to aggressively pursue the nearly 50% of Mastercard’s market which was cash and check based on both the consumer and B2B side. As the rails that power the settlement of a significant portion of PayPal’s (PYPL) volume, Mastercard additionally has benefited and will continue to benefit from PayPal’s strong transaction growth as well.

With a play in Mastercard, investors not only get access to natural GDP growth in emerging market economies that comes with increases in consumer spending, but additionally Mastercard represents a play on the war on cash against which major strides have been taken during the pandemic and with the inevitable growth in e-commerce, will continue to occur well into the future.

Concluding Thoughts

While the pandemic has seen a significant number of businesses experience strongly negative impacts, a select few businesses have managed to survive and thrive in spite of the chaos and uncertainty that has occurred around them. The key for investors is to be able to further discern which of these businesses can sustainably grow from here, and which will once again fall back to pre-pandemic levels. Looking at strong players in digital commerce, digital health, cyber security, digital payments and digital advertising can be good places to start.

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Disclosure: I am/we are long MELI, BABA, AMZN, LVGO, ZS, MA, TTD. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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