There’s been no shortage of hot tech stocks in 2020. The COVID-19 pandemic, for all its manifold horrors, has been, not only less aggressive toward tech stocks, but in certain instances, downright friendly.
Which brings us to two hot tech stocks in 2020—Netflix Inc (NASDAQ:NFLX) and Snowflake Inc (NYSE:SNOW)—that perfectly suit the current market conditions. Indeed, while the two companies aren’t necessarily competitors, they offer different approaches to the tech stock market in 2020 and beyond.
NFLX stock and SNOW stock represent two different ways to profit from the current market conditions, and I believe that one of them is clearly superior.
But before I get into why I think Netflix stock and Snowflake stock represent two divergent paths for investors in 2020, I’ll outline the state of the market.
While the pandemic has wrought havoc across the board (both on and off the stock market), what it hasn’t done is slow down tech stocks. Despite a brief dip in the market at the onset of the COVID-19 outbreak, tech stocks were quick to bounce back and, for many of them, this has been their best year on record.
My point being that tech stocks have proven to be pandemic-proof. Why? Simple: they’re geared toward the future. And the pandemic is bringing the future to us a lot faster.
Allow me to explain.
The death of the workplace as we know it has long been foretold. We’ve seen eulogy after eulogy in the business press for years.
Before the pandemic, people were already moving to work-from-home setups. Others were completing more and more of their tasks digitally. Many others wondered if we’d even need permanent office spaces in the 21st century.
Fast-forward to today: you can’t shake hands. You can’t be out in public without a mask. Heck, you can’t even be in the same room with people anymore without a number of precautions.
That, my friends, is what we call a catalyst.
The move toward remote work was already in the cards, but the pandemic has accelerated the trend. COVID-19 has made it a risk to visit your mother on weekends; not many people want to add an extra layer of danger by gathering around a water cooler at the office.
The result has been that many companies that sought to capitalize on the future of work were, overnight, instantly validated.
Take Zoom Video Communications Inc (NASDAQ:ZM).
Chart courtesy of StockCharts.com
Like you, I had never paid Zoom much attention before 2020. I considered its online conferencing service a “Skype” clone with a focus on business. Yeah, not a bad idea, but it was operating in a crowded market with no real way to differentiate itself.
Then 2020 happened and everything we thought we knew was upended.
Zoom stock soared as the company became the go-to for online communications—especially business-related communications—which led to the company’s absurd growth rate in 2020.
ZM stock is illustrative of the pandemic’s catalytic relationship to tech stocks.
So we have a whole smattering of stocks that maybe weren’t all that exciting (or at least were still a few months or years away from being exciting) becoming powerhouses in the span of a few months.
And that, at last, brings us to Netflix stock and Snowflake stock.
NFLX Stock Reliable, SNOW Stock Volatile
Both Netflix stock and Snowflake stock have done well in 2020—there’s no denying that.
Both companies have seen impressive growth trends and both are poised to take advantage of the new, pandemic-influenced world.
Chart courtesy of StockCharts.com
With Netflix Inc, it’s because people staying at home more means more opportunities to watch television.
Consider that, in the old days, when you took a break at work, you could leave your desk and maybe take a walk around the block for 15 minutes. Now, when working from home, you can sidle over to your couch and watch 15 minutes of your favorite show before getting back to work.
That new reality has been a boon to holders of NFLX stock, which has gone up roughly 50% year-to-date.
Snowflake Inc, on the other hand, finds itself in a very different position. The company is a cloud-based data analytics and storage company. Which is to say that it keeps and provides insights on company data to help businesses make informed decisions.
More importantly, it held the largest software initial public offering (IPO) of all time this year. Snowflake stock doubled its value in the span of a day when it hit the public market.
The company has since become something of an industry darling, with investing moguls like Warren Buffett throwing his support behind the company via his company Berkshire Hathaway Inc. (NYSE:BRK.B). Berkshire gained about $800.0 million from SNOW stock on its first day of trading. (Source: “Warren Buffett’s Berkshire Hathaway Made $800 million on Snowflake’s First Day of Trading as the Stock Spiked,” Business Insider, September 17, 2020.)
Snowflake stock, in other words, took advantage of its presence in a growing sector—software as a service (SAAS), specifically cloud-based software—and leveraged that position to go public at a time when the stock market was particularly hungry for tech companies.
Furthermore, the company is also not at risk of the pandemic getting in the way of its supply chain, making it another safe bet at this time.
But moving forward, when a company sees growth like Snowflake has post-IPO, there’s a good chance that volatility will follow, especially as market conditions return to normal (someday). More and more analysts will begin to ask whether Snowflake stock is overvalued.
I believe that, while volatility is in store for SNOW stock, overall, it has a chance to be a bright star.
But, and this is a big but, I think Netflix stock is the better opportunity. Why? Because Netflix stock, while benefiting from the current market surge, isn’t reliant solely on the current market conditions to be successful.
And by that I mean that we know Netflix stock is solid; it’s been solid for years.
But we don’t know how SNOW stock will fare in a post-pandemic world. Although many of the companies that have been surging due to the pandemic-created market conditions will likely be able to parlay that momentum into future gains, there’s a chance that, should the world limp back to normal and people go back to their workplaces, they could see a drop-off in value.
Consider that Snowflake Inc is perfect for this moment. Cloud computing is increasing in importance as companies migrate their data online to accommodate new work configurations. The tech sector has been rising. Software companies face little risk of being disrupted by the pandemic.
That’s a perfect storm for gains.
When that storm passes, however, can SNOW stock remain relevant? I believe it can, but there’s a good deal of risk involved.
Consider that, since Snowflake stock’s IPO, it hasn’t really been all that special (see the NFLX/SNOW chart above).
In other words, if the conditions begin to turn against it, I could see the company declining precipitously.
Netflix, conversely, just missed slightly on its recent quarterly earnings report and its shares only took a slight hit. That’s because, as an established company, it doesn’t need market conditions to be absolutely perfect to generate stock gains; those gains are going to continue in 2021 and beyond regardless of how the world looks (within reason).
While there are a lot of different ways to make money on the tech stock market in 2020, investors shouldn’t get distracted by shiny new toys.
Yes, new tech stocks are great ways to make absurd gains in a short period (and I write about these opportunities often), but for investors who seek gains over the long term (and more stability in their portfolio), companies like Netflix Inc are the better opportunity.