Work-from-home stocks are set for long-term growth
Head of Equity Strategy
Summary: Covid-19 has led to an acceptance of working from home and altered our behaviour for certain leisure activities and health care checks. In this equity note, we discuss these emerging trends and look at a basket of 13 stocks that could potentially benefit from them. The basket is already up 102% this year, reflecting the large demand from investors.
In our research note ‘Is your portfolio ready for the online future?’ we highlighted a large basket of stocks offering exposure to the rising trend of the online economy. Here, we’ll focus on work-from-home-related stocks and take a look at the outlook for this emerging trend.
The Covid-19 pandemic catapulted society into the future in terms of more flexible working conditions and the ability to work from home. With no good vaccine on the table yet, societies are forced to maintain social distancing, limiting the demand for workers’ presence in the office and changing our habits around health care checks and leisure activities. The table below shows 13 US-based stocks offering exposure to the work-from-home trend, as well as these new leisure and health care activities. It’s not exhaustive, and some may wonder why stocks such as Microsoft (with its Team product) or Facebook, with its video conferencing and Workspace products, are not on the list. The short answer is that we want to highlight the most direct exposure possible and Microsoft and Facebook get the majority of profits from their core businesses in operating systems and online advertising.
|Name||Industry||Mkt. cap. USD mn||FCF yld (%)||Sales growth (%)|
|Zoom Video Communications Inc||Software||70,884||0.50||111.2|
|Slack Technologies Inc||Software||19,284||-0.13||53.4|
|Citrix Systems Inc||Software||17,881||3.90||5.2|
|Atlassian Corp PLC||Software||45,558||1.19||35.3|
|Crowdstrike Holdings Inc||Software||22,632||0.54||88.7|
|Peloton Interactive Inc||Leisure Products||15,020||-1.77||80.6|
|Fastly Inc||IT Services||7,549||-0.63||38.2|
|Teladoc Health Inc||Health Care Technology||15,258||0.19||32.5|
Source: Bloomberg and Saxo Group
* FCF yld is free cash flow yield measure by 12-month trailing free cash flow relative to current enterprise value.
The basket of stocks is generally priced above the current general market valuation, with an average free cash flow yield of 0.8%. On the other hand the group is growing fast, with 12-month trailing sales y/y up 44% on an equal-weight basis. Evidence of the faith investors are showing in the work-from-home trend is the total return year-to-date, which comes out at 102% (equal-weight) for this group. The basket of stocks has also significantly outperformed the S&P 500 since 2015. The main question that investors should ask themselves is how likely it is that the trend continues? Mark Zuckerberg recently suggested that half of Facebook’s employees could do their work outside its offices over the next 5-10 years. Twitter has actively adopted an infinity policy on work-from-home making it possible for employees to choose their own working life. Our view is that the work-from-home trend will continue as many companies will allow employees to have mixed working schedules, shifting between being at the office and working from home. This will underpin demand for remote technology solutions over the coming decade.
The key risk for this basket is of course rising interest rates, which could hit valuations hard and thus set in motion a sharp correction in these stocks. With a free cash flow yield of 0.8% the valuation is aggressive and leaves little margin of safety for any deviations for the current discounted trend. The production and quick global rollout of a Covid vaccine is another key risk as it could cause a rollback of the work-from-home trend before it has fully established itself.
Latest Market Insights
Quarterly Outlook Q3 2022: The Runaway Train
- Central banks' attempts to kill inflation is a paradigm shift, which could end in a deep recession.
Tangible assets and profitable growth are the winnersWith US equities officially in a bear market, the big question is where and when is the bottom in the current drawdown?
Understanding the lack of investment appetite among oil majorsThe everything rally seen in recent quarters has become more uneven, as its strength is driven by commodities in short supply.
The pressure is on as the wind leaves the sailsWith cryptocurrencies in sharp decline, are we entering a crypto winter or is the bear market a healthy clean-up of the crypto space?
Why the Fed can never catch up and what turns the US dollar lower?Many other central banks are set to eventually outpace the Fed in hiking rates, taking their real interest rates to levels higher than the Fed will achieve.
Bank of Japan: Swimming against the tideThe Japanese economy has gone from the age of deflation to rapidly rising prices in no time, leaving the Bank of Japan in a pickle.
Green transformation detour and bear market hibernationWith the impending risk of global econonomic derailment, we share the five things investors need to consider in this new half year.
Crisis redux for the eurozone?Whether there's going to be a recession in Europe or not, the path towards a stable economy will be agonizing.
Technical Outlook: Gold, Oil and a remarkable multi-decade perspective on EquitiesThe Nasdaq bubble pattern, USDJPY resistance, crude oil uptrend losing steam and the technical outlook for USD.
China: the train of new development paradigm left the station two years agoChina is transiting to a new development paradigm, as they are hit by deteriorating terms of trade, a slower global economy and an uncertain future while continuing attempts to contain the pandemic.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)