Rewind to January 2020 and most people would not have predicted where we are today. The thought of a global pandemic raging on for over a year was far from forecasted or ideal. Fast forward to today and most workers have been forced to work remote for some time now making global communications more important and relevant than ever. While this was always an important sector as keeping the world connected and making it feel "smaller" was growing everyday, the last 12 months has really made it an emphasis and sped up development more so than ever. Our long term outlook is that as long as people are truly harnessing the power of communications to power remote work, continued investment will pour into this space. The companies that develop the strong technology that power global comms will end up creating large moats for themselves as the future providers of connecting the world.
Given the importance of this sector today and into the future, we've decided to release our top 3 stocks in this sector. Each below, is not only a good play from a bottom's up perspective but plays nicely into our top down analysis (more on these below) on the go-forward invest-ability of the sector.
1) Twilio (TWLO) - Medium Risk Play: Trading at over 34x revenue, investing in Twilio doesn't come cheap. However if you've followed our research, you know that we have and continue to love Twilio. While the economics of inflation don't bode well for the current valuation of Twilio, the bet we're making on them is extremely long term in nature regardless. Our bet is that they will be a massive part of the underlying infrastructure powering global communications going forward.
2) Casa Systems (CASA) - High Risk Play: While we've written about them before, for those of you unfamiliar, Casa is pioneering advanced ultra-broadband 5G solutions for mobile, cable, fixed and converged service providers. While you're probably unaware of it, you probably have some of their technology in your home! Making a risky bet on the future of 5G casa is a way to play the infrastructure side of the communications play going forward. Trading at a revenue multiple (~2x), the stock is still up over 100% in the last year. While the rally could keep going it is subject to a pull back as inflation will affect its outlook. The bet again on this is that they'll be relevant in 5+ years from now!
3) Disney (DIS) - Low Risk Play: Following the trend, Disney is another example of a company we've long been investors in. Paying a nice 1.8% dividend on top of their stock appreciation potential, and Disney is a strong investment for the "play it safe" investor. With recent investments into Disney+, Disney is making strong strides to modernize their product suite. Pair that with the content they're producing over the next few years and they're in a strong position to continue taking market share. Disney has been and will continue to be a strong company for years to come!
Top Down vs. Bottom up:
A top-down analysis is when investors first take a broad picture of the economies and sectors they want to invest in and then start funneling downwards towards the stocks within those sectors that they like. This means that they first look towards macro level plays before choosing their stock selection.
Alternatively a bottoms up approach takes an industry level agnostic view and just looks for companies that have strong fundamentals, regardless of the sectors they operate it. In this example investors don't care about the macro forces and just care about the resiliency of the companies they operate in.
As it relates to this analysis we employed both techniques to derive the companies above.
That is we used a top down analysis which ultimately identified the communications sector as attractive. Additionally we used a bottoms-up analysis to identify the best companies in this sector regardless of the unique macro forces each will be impacted by.