A second wave of the COVID-19 has gripped the Northern Hemisphere and there could be another phase of lockdown. The presidential election has also kept investors on tenterhooks. The market has also started reacting to the growing uncertainty, as evident from the S&P 500’s 5.6% plunge last week. Besides the resurgence of the virus, the ambiguity over the fiscal stimulus package is also leading markets lower. Though the S&P 500 closed yesterday’s trading session with 1.1% positive returns, the broad market sell-off last week could be a signal of some more weakness in November.
While tech stocks soared from the market crash in March, they have lost steam since September. The Technology Select Sector SPDR ETF (XLK), with a 32.4% one-year return, has outperformed the S&P 500 by a huge margin. Investors’ perception about the technology sector has significantly changed amid the “new normal.” Technology stocks are now considered as defensive stocks in the current environment due to the dependence of individuals and businesses on technology platforms to stay functional in the “new normal.”
The disruptive technology companies in cloud computing, EdTech, and the 5G space have long-term potential. Three such companies are QUALCOMM Incorporated (QCOM), ServiceNow, Inc. (NOW), and Chegg, Inc. (CHGG). So, it would be wise to pick up these stocks on the dip to capitalize on their future.
QUALCOMM Incorporated (QCOM)
QCOM is a world-class designer, manufacturer, and seller of chipsets in the United States, China, South Korea, and Taiwan. Besides semiconductors, QCOM also produces software & services, and intellectual property primarily for wireless technology.
After settling its dispute with Apple (AAPL) in 2019, the iPhone maker is all set to use various permutations of QCOM’s X65 and X70 modems in its 2022 and 2023 launches. As the iPhone 12 is powered by 5G, it is expected that QCOM’s 5G chipset would see a surge in demand.
In September, the US Court of Appeals for the Ninth Circuit ruled in favor of QCOM and indicated that its patent licensing wasn’t anti-competitive as alleged by the FTC. Therefore, investors who have avoided QCOM over the legal battle, can now only focus on the 5G-based potential of the stock.
During the third quarter that ended in July 2020, QCOM’s revenue remained unchanged at $4.9 billion. Its EPS declined to $0.74 from $0.86 posted in the year-ago period. For the fourth quarter, the company expects approximately a 15% year-over-year reduction in handset shipments because of COVID-19 and an iPhone 12 launch delay.
The consensus estimate for the fourth quarter that ended September 2020, indicates a 50% year-over-year increase in EPS to $1.17. Revenue for the fourth quarter is expected to grow 23.6% to $5.9 billion.
The stock surged 40.5% on a year-to-date basis to end yesterday’s session at $123.97. Over the past six months, the stock rallied 63.9%.
How does QCOM stack up for the POWR Ratings?
A for Trade Grade
A for Buy & Hold Grade
A for Peer Grade
A for Industry Rank
A for Overall POWR Rating
You can’t ask for better. The stock is also ranked #2 out of 86 stocks in the Semiconductor & Wireless Chip industry.
ServiceNow, Inc. (NOW)
NOW is one of the fastest expanding cloud vendors that empowers companies to manage its workflow digitally. It offers a portal that employees can use themselves to access administrative and workflow tools. NOW creates a repository of historical data of IT departments to manage their services. However, now the company also provides software for human resources, customer service management, and security.
NOW’s subscription revenues for the third quarter that ended September 2020 increased 31% year-over-year to $1.1 billion. The revenue surpassed the market estimate narrowly. The company has over 1,000 customers with an Average Contract Value or ACV of $1 million. NOW also landed its largest deal with its largest customer crossing more than $40 million.
Based on its splendid performance during the quarter, NOW raised its full-year guidance for subscription revenue to between $1.15 and $1.16 billion, up 28-29%. The consensus estimate for NOW’s fourth quarter revenue is $1.2 billion, indicating a 24.2% increase year-over-year. The EPS estimate for the quarter ending December 2020 is expected to be $1.06, up 10.4% year-over-year.
NOW surged 76.2% year-to-date to end yesterday’s session at $476. Over the past six months, the stock rallied over 41.5%. The stock dipped slightly after its third-quarter results and corrected by 3.2% in the past week.
Hence, NOW is rated a “Buy” in the POWR Ratings. It holds an “A” in Trade Grade, Peer Grade and Buy & Hold Grade, and a “B” in Industry Rank. It is the #1 ranked stock in the Software – Business industry.
Chegg, Inc. (CHGG)
CHGG is an EdTech company that offers online tutoring, textbook rentals- digital and physical, as well as other services like digital flashcards and homework solutions. The company also provides a subscription for academic writing to students. Not just this, CHGG also helps students to find the right scholarship for themselves. With schools and universities shut down due to the pandemic, online studying has been on the rise, and CHGG has benefited immensely from this trend.
During the third quarter that ended September 2020, CHGG’s total revenue climbed 64% year-over-year to $154.2 million on the back of 69% subscriber growth to 3.7 million. The company has seen an expansion in its subscriber base, both domestically and internationally. CHGG’s service revenue surged 72% year-over-year to $118.9 million. However, loss per share expanded to $0.29 during the third quarter, from $0.10 posted in the same period last year.
Analysts expect EPS for the quarter ending December 2020 to surge 40% year-over-year to $0.49. Meanwhile, revenue is estimated to jump 50.3% year-over-year to $188.7 million.
On a year-to-date basis, CHGG surged 93.7% to close at $72.88 yesterday. Over the past six months, the stock has rallied 71.8%. It plunged 15.4% during the past week due to the ongoing weakness in the market, but being a growth stock, it is likely to reward investors in the long-term. Thus, this drop offers a lucrative entry point.
It’s no surprise that CHGG is rated a “Buy” in our POWR Ratings system, with a grade of “A” in Trade Grade and Industry Rank, and a “B” in Peer Grade. In the 58-stock Internet industry, it is ranked #12.
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QCOM shares were trading at $126.29 per share on Tuesday morning, up $2.32 (+1.87%). Year-to-date, QCOM has gained 46.17%, versus a 6.41% rise in the benchmark S&P 500 index during the same period.
About the Author: Namrata Sen Chanda
Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education. More...
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