With the new financial year under way, now is an opportune time to begin planning for the year ahead. While the Coronavirus pandemic and global recession have raised one of the biggest challenges to businesses in modern history, they have also spurred on opportunities, particularly in the technology realm. That means years’ worth of digital transformation in just a few months.
Although markets have pared their losses in recent weeks, or in the case of the NASDAQ reached new all-time highs, the tech-inspired thematics playing out give rise to the need to identify stocks with resilience and leverage to developing trends. On that point, here are three stocks to hold this financial year.
Adobe (NASDAQ: ADBE)
One of the most familiar software applications right around the world, Adobe has been on the cusp of transforming cloud computing as we know it.
The company’s growth prospects lie largely with its software sales licensing model. Customers pay a low up-front cost to subscribe to the Adobe Creative Cloud. The all-in-one design and creative suite appeals to users thanks to its breadth and therefore, value. With work-from-home arrangements driving the use of digital documents, subscription demand is soaring, representing around 90% of all revenue and providing significant visibility thanks to its recurring nature.
In its most-recent quarterly results, Adobe posted its sixth consecutive ‘beat’, painting a history of underpromising and overdelivering. As management said at the time, the result underpins the shift to ”all things digital”, with revenue up 14% to a record US$3.13 billion, while earnings jumped around a third to US$2.45 per share.
In terms of penetrating further into markets throughout Asia and Europe, Adobe’s enormous scale, brand image and market-leading competitive position in the ‘Digital Media’ industry are crucial competitive advantages. Yet at the same time, management are prudently accelerating the elimination of low-margin ‘Advertising Cloud’ transaction-driven offerings, which will bring efficiencies to the bottom line. Acquisitions, meanwhile, stand to complement the company’s vision to grow its ‘Digital Experience’ segment in a market worth US$84 billion.
Visa (NYSE: V)
One of the prominent trends to emerge in recent months amid the Coronavirus pandemic has been the acceleration in the shift from cash transactions towards digital payments. Locally, much of the focus has been centred on buy-now pay-later companies, however, Visa as the world’s largest payments processor is placed as well as any company on the market to ride out the pandemic.
With every transaction that flows through its network, Visa clips a fee on the way. And while overall consumer spending might be patchy, the fact that a higher proportion of consumers will be using digital payments in place of cash, due to concerns around virus transmission and the convenience of e-commerce, means Visa stands to gain.
One of the things to look for in a sustainable business is a strong moat and Visa certainly has that. Even if credit cards are slowly easing in popularity, debit cards will always be here. On top of that, Visa’s exposure to consumer expenditure is spread across discretionary and non-discretionary spending, providing it a robust mix of revenue. All the while, transactions across the Visa network continue to grow, up 7% across the last year to more than 50 billion.
There is also reason to believe mid-to-long term consumer behaviour may permanently favour digital payments, which means now could be just the beginning of a period of significant growth. As Visa partners with Facebook to push out WhatsApp payments in Brazil, real-time push-payment and transfer technology is the next growth lever for the giant. If that goes to plan, it has 2 billion WhatsApp users across the world in its sights.
Intuitive Surgical (NASDAQ: ISRG)
Intuitive Surgical is a leading designer, manufacturer and marketer of advanced robot-assisted surgical systems and related instruments. The company’s technology, including its leading ‘da Vinci’ system, caters to minimally-invasive surgery, which reduces the risks compared with open surgery. While health care stocks are generally seen as a more defensive and ‘safer’ play, ISRG has a significantly greater growth profile on account of the company’s technological prowess.
In the first quarter, procedures using ISRG systems were up 10% year-on-year. International markets have only recently begun to open up for the company and now offer a lucrative growth channel. Nonetheless, over the last two decades, ISRG has rolled out and installed around 5,700 of its systems, which is far more than all of its competitors combined.
The above market presence means that ISRG has deep-seated connections with medical experts, which is vital in the industry for gaining further penetration. It also means that churn is minimal as the company undertakes training that staff become accustomed to, while ISRG also service and provide instruments for various procedures. In fact, servicing and instruments are higher-margin contributors for the business, so as scale builds, so too does recurring revenue and the contribution to the bottom line.
It’s also worth noting that medical illness and the need for surgery are fairly consistent year-to-year. While COVID-19 has skewed that somewhat, with elective surgery disrupted, that demand is set to come back online strongly when lockdown restrictions are eventually lifted and sustained. This ‘demand’ isn’t going to disappear as might be the case for discretionary spending, which means ISRG’s products and services could have a strong tailwind behind them.
Conclusion: Resilient traits support earnings upside
The stocks we look for in times like this all feature a combination of some simple traits. These include, clear market-leader positioning, diverse streams of recurring revenue, international scale and scope, and exposure to behavioural thematics that cater to future earnings growth. All three of these companies excel in these areas and in our view, each currently represents a sound risk-appropriate investment to hold this financial year.
Don't forget to give this article a like and follow if you enjoy our content.
That’s all very fine but what are your ASX equivalents..? Especially in relation to Visa / MasterCard use. More and use Tap n Pay so what’s going to replace that ..?
Is there good reason for choosing Visa over MasterCard? Both seem to be in lockstep
Hi guys, yes V and MA much the same. We currently hold both in our growth portfolio. Grenville, there are no global equivalents on the ASX. If you want exposure to this sector I would suggest going directly to the US market, it's very accessible these days.