(Veteran tech columnist Jon Markman is publisher of Strategic Advantage, a popular daily newsletter about the great digital transformation of business, entertainment and society -- and how to invest in it. Click here for a free two-week trial.)
With good news on the COVID-19 vaccine front investors are selling so-called lockdown stocks.
Yet they are wrong to sell Domino’s Pizza ( (DPZ) - Get Report) and Activision Blizzard ( (ATVI) - Get Report), and here’s why.
Pfizer ( (PFE) - Get Report) Monday morning said its coronavirus vaccine is 90% effective. Moments later investors indiscriminately sold shares of businesses that have benefitted from global lockdowns.
Domino’s and Activision surely benefitted but the underlying trend is much bigger than the pandemic. Weakness early this week is a buying opportunity.
Domino’s built the world’s largest pizza delivery brand with fast delivery, tasty pizza and fair prices. Then managers at the Ann Arbor, Mich.-based company went a step further.
They used software to remove all of the friction between thinking about pizza and getting it.
Ordering, payment and even tracking moved onto a personalized smartphone app. Want a hot pizza in a hurry for the Packers game this afternoon? Boom, a couple of taps and swipes your favorite pie is out for delivery 15 minutes later and you can track it from oven to your door.
This strategy evolved from the Domino’s business model. For years the company built a thriving brand without owning thousands of stores, holding inventory or even paying drivers. Its franchise structure offered control, extreme operating leverage and huge cash flows.
Activision managers prosecuted a similar business innovator. Instead of selling shrink wrapped software, the Santa Monica, Calif.-based company revolutionized video games by taking distribution online, then monetizing player engagement.
From Crash Bandicoot and Candy Crush on mobile, to Call of Duty and Overwatch online, selling avatar paraphernalia and extended gameplay options became the business drivers. Explosive sales growth followed.
Revenues during the first quarter reached $1.5 billion, up 21% year-over-year as players spent more time online. Engagement is a key metric often overlooked by investors. Gamers are vested in the storylines and outcomes.
And while the global pandemic kept more people inside, the key for Activision was planting the seed of video games as mainstream entertainment. This engagement should not decline substantially as global lockdowns fade. The rise of game culture is a megatrend.
In many ways Activision and Domino’s are built on a similar foundation. Both firms got to digital first and best. They now dominate their markets with best in class technology. This advantage is not likely to recede anytime soon.
Shares of each company opened about 8% lower Monday before finding strong bids near their respective 200-day moving averages. These businesses are extremely strong, well managed businesses and have been built for the digital era.
Investors are making the foolish bet that a possible vaccine next year will reverse trends that began long before the pandemic. That is simply not likely. If anything COVID-19 and lockdowns have reinforced these transformative digital trends.
Today, more people than ever understand how easy it is to order pizza without calling a store or talking to a human being. Domino’s algorithms know their favorite pizzas and where to send the delivery. Its loyalty programs automatically tabulate rewards.
And Activision has enrolled more players than anytime during its history. These gamers, many of them new to the world, are unlikely to choose another form of entertainment. Gaming is a lifestyle.
Profits at Domino’s during Q2 surged to $118.7 million, up from $92.4 million a year ago. The top line was stronger, too. Revenues jumped to $920.0 million, from $811.6 million last year. Analysts who cover the company, according to data from FactSet, were expecting sales of only $915.0 million.
When Activision reported Q3 financial results in October revenues surged to $1.95 billion, well above the previous guidance of $1.8 billion. Managers claimed the better results were due to stronger engagement and higher player investment.
Weakness in these businesses’ shares is a buying opportunity.
My price 12 month target for Domino’s is $460, representing a gain of 22% from current levels. I have $106 12 month price objective for Activision, or 37% above current levels.