This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

The software industry is fertile ground for investors today. Demand is on a long-term upswing, supported by a steady shift toward online work and entertainment. Many software businesses have more attractive selling models that are becoming increasingly subscription based, in turn stabilizing cash flows. And valuations have declined sharply with the latest bear market.

With those positive factors in mind, let's look at two excellent options for investors seeking exposure to the sector. Read on for a few reasons to like Adobe (NASDAQ: ADBE) and Electronic Arts (NASDAQ: EA) stocks right now.

1. Adobe

Adobe stock has become cheaper this year, partly thanks to a growth slowdown and partly due to worries about its $20 billion acquisition of Figma. The growth hangover won't last forever, and the buyout will likely reward patient investors.

Adobe creates software products for digital creators ranging from students to huge global brands. Its cloud platforms have attracted many more customers this year, even on top of soaring growth in earlier phases of the pandemic. Sales are up to $13.1 billion through the first nine months of the year compared to $11.7 billion a year earlier.

Operating trends might look weaker over the next nine-month period, and Adobe is taking on some extra risk as it incorporates the new Figma business into its cloud platform. But the volatility from these issues should fade, allowing patient shareholders to generate solid returns by simply holding onto this software-as-a-service stock.

2. Electronic Arts

Electronic Arts is a video game developer boasting one of the industry's most dominant content portfolios. From sports franchises to adventure games, casual titles to battle royale brands, EA covers every industry niche and all of the popular monetization models.

That diversity is paying off. Sales in the most recent quarter were up 22% thanks to popularity across brands like FIFA 22 and Apex Legends. EA is also still boosting its earnings at a time when many other digital entertainment specialists are seeing falling profit margins.

That success is a big reason the stock is outperforming peers like Take-Two Interactive (NASDAQ: TTWO). But EA still looks attractive today at a valuation of less than five times sales, one of the cheapest rates investors have seen in the last seven years.

While demand in the video game industry might slow into 2023 as compared to the past few years, the long-term outlook is bright for this business. It is becoming more profitable and steadier, too, thanks to the shift to a subscription-based content model. As a result, investors are likely to see good returns in this software niche over time, especially if they focus on world-class businesses like EA.

Adding EA and Adobe to your portfolio might add volatility in the short term, given the rocky outlook for many tech specialists right now. In exchange for that bumpiness in returns, though, you'll get exposure to some world-class businesses that are almost certain to be posting stronger sales and earnings in five years than investors are seeing today.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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• 3 ASX ETFs with market-beating potential over the next 10 years

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Adobe Inc. and Take-Two Interactive. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended Electronic Arts and has recommended the following options: long January 2023 $115 calls on Take-Two Interactive, long January 2024 $420 calls on Adobe Inc., and short January 2024 $430 calls on Adobe Inc. The Motley Fool Australia has recommended Adobe Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Netflix's (NASDAQ: NFLX) earnings report is always closely watched on Wall Street. The subscription streaming video leader routinely wowed investors even before the pandemic put a new global premium on at-home entertainment.

But its upcoming fourth-quarter announcement, set for 20 January, will be followed for different reasons. Namely, investors are looking for evidence that Netflix can recover from a growth hangover and speed its sales growth rate back up above 20%.

There's also concern about just how quickly the company can boost profit margins and cash flow now that the business is maturing.

Let's take a closer look at what could be reported on Thursday.

Netflix could see strong subscriber gains

You wouldn't know it by following the sinking stock price in recent weeks, but Netflix is likely to report strong growth for the Q4 period that runs through late December. Management in October forecast adding 8.5 million new subscribers compared to 4.4 million in the third quarter and 8.5 million a year ago.

That blockbuster result would be supported by a flood of new content releases, with hits like Don't Look Up and The Witcher likely to receive shout-outs from co-CEO Reed Hastings and his team.

Hitting that growth figure would keep Netflix below the 20% annual sales growth rate that management has highlighted as an important milestone. Still, we should get a better idea about the company's prospects for accelerating revenue gains again after sales trends soared by 24% in 2020 but slowed to about 19% in 2021.

Netflix investors are looking for margin updates

Investors looking for an inflation-proof stock have been attracted to Netflix for good reasons. Operating margin has been rising at almost exactly the 3 percentage-point annual target that management has outlined. It's on pace to cross 20% of sales this year compared to just 4% back in 2016.

NFLX Operating Margin (TTM) data by YCharts

Whether or not that metric keeps climbing toward 30% of sales depends on Netflix's growth rate, the competition, and its ability to boost the value -- and price -- of the service over time. Management's favourite way to describe the potential is the fact that Netflix still only accounts for less than 10% of total TV watching time in the US, its most mature market. Investors are hoping the company can boost that figure by broadening its content catalogue to better rival cable networks.

Will Netflix's cash flow remain strong?

If its latest batch of movie and show releases worked, then Netflix will issue a short-term growth outlook for the first quarter that looks good compared to the prior year's spike of 4 million new subscribers. Investors might get more positive news in the form of cash flow, which is now strong enough to handle all of Netflix's funding needs, plus aggressive stock buybacks, going forward.

Those financial wins all point to the potential for additional market-thumping returns for shareholders. But Wall Street is asking for more from growth stocks, even well-established market leaders like Netflix, right now.

The report on Thursday might give investors that certainty they've been chasing. It's more likely that the announcement answers some questions around earnings and profitability for 2022, while raising more about Netflix's global membership potential. In any case, it will be worth watching what the digital entertainment titan has to say about the industry as pandemic demand trends settle to a new normal.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Demitri Kalogeropoulos owns Netflix. The Motley Fool owns and recommends Netflix. The Motley Fool Australia has recommended Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Investors were looking forward to hearing Activision Blizzard Inc.'s (NASDAQ: ATVI) fourth-quarter earnings report on Monday. The video game developer had trounced expectations through most of 2020 as it capitalized on spiking interest in at-home entertainment options. Its core Call of Duty franchise set new records for engagement and in-game spending in recent quarters, too.

That positive investing story held up through the holiday season, with overall results again blowing past the short-term forecast that CEO Bobby Kotick and his team issued.

Let's dive right in and see what the latest report says about this game producer's future.

Strong momentum

Sales landed at $2.4 billion, easily exceeding the $2 billion forecast that management issued back in late October. Growth was led by the Call of Duty franchise, which benefited from popular new releases and a robust ecosystem of content on mobile devices, PCs, and gaming consoles. Call of Duty: Black Ops Cold War, its latest major launch, attracted 70% more players than last year's iteration. The brand grew in the mobile segment and in the free-to-play niche, too, all contributing to Activision reaching a record audience size over the holidays.

Engagement is also setting new highs, according to the report, with average hours played rising and in-game purchasing spiking. "We saw the benefits of fundamental changes to our core franchises [in 2020]," management said, "including deeper and more consistent engagement with current and new players across platforms.

Financial wins

The engagement translated directly into higher earnings. The Activision side of the business more than doubled its profits as operating margin jumped to 47% of sales in Q4. Blizzard had a weaker outing due to a slimmer release schedule, but World of Warcraft still logged growth. Video-game developer King Digital benefited from higher in-game spending and advertising revenue to allow Activision Blizzard to book solid earnings from its casual-gaming division.

ATVI Operating Margin (TTM) data by YCharts

All these wins translated into fourth-quarter earnings of $0.65 per share compared to the $0.44 per share that Wall Street was expecting. "As we expand the opportunities for fans to engage in our [intellectual property]," executives said, "we expect strong financial performance to follow."

Looking ahead

The company issued a bullish outlook for 2021 that implies significant improvements over this past year's record results. Activision also plans to send more cash to shareholders through stock buybacks and a dividend that was just hiked by 15%.

The company's strategy boils down to applying what its learned with Call of Duty to a few other franchises. Investors had worried in 2019 that the brand might be showing its age, but Activision poured resources into its development while extending its reach into new platforms and paying models. Those initiatives worked so well that they're already being used on other brands. "We are accelerating our path to reach a billion people as we apply the Call of Duty framework to other franchises," the company said.

This approach has a good shot at producing several additional brands that consistently achieve at least $1 billion in annual revenue within the next few years.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Demitri Kalogeropoulos owns shares of Activision Blizzard. The Motley Fool owns shares of and recommends Activision Blizzard. The Motley Fool has a disclosure policy.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Activision Blizzard. The Motley Fool Australia has recommended Activision Blizzard. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

McDonald's Corp (NYSE: MCD) just closed the books on a forgettable year for the business. COVID-19 continued to sink customer traffic across its global portfolio of stores through the end of 2020, the fast-food giant said in its recent earnings report. 

Yet McDonald's notched a few wins that point to a better 2021 ahead, assuming the pandemic threat fades over the next few months.

Let's take a closer look.

McDonald's steady rebound continued in the three months that ended in late December. Comparable-store sales were down just 1% globally, compared to a 2% drop last quarter and a 25% slump in fiscal Q2. Declining revenue isn't normally a cause for celebration, but management highlighted several bright spots in a tough year.

These include the fact that sales landed in modestly positive territory in the core US market thanks to a quick shift to a drive-thru and home delivery focus. That result kept the chain ahead of peer Starbucks for the year, but trailing Chipotle Mexican Grill.

"2020 will be remembered as one of McDonald's most challenging ... moments in our long history," CEO Chris Kempczinski said in a press release.

Earnings are down

The earnings picture is less encouraging and reflects the depth of the chain's operating slump in 2020. Profits in Q4 fell 9% after excluding currency exchange rate shifts, and were down 20% for the full year. That metric trailed McDonald's revenue trend thanks to extra costs related to COVID-19 safety and elevated marketing spending aimed at supporting franchisees.

The fast-food industry has become more competitive in recent months as national chains fight over pieces of a flat market.

MCD Cash from Operations (TTM) data by YCharts

McDonald's finances endured a COVID-19 hit but they're still strong. Operating cash flow declined by roughly $2 billion in 2020 yet was solidly positive at $6.3 billion.

The chain continued spending cash on its growth initiatives like store remodels, product launches, and delivery.

"By investing for the future and leveraging competitive strengths, we're confident we can continue to capture market share and drive long-term sustainable growth," Kempczinski said.

Looking ahead

Management didn't issue a forecast for the new fiscal year, but McDonald's is likely to report significant growth this year. The fiscal first quarter, which started a few weeks ago, is up against a prior-year period that included significant early impacts from the pandemic. Comps dove 13% in the US in March last year and fell 35% in the company's core international segments. Both areas should see significant improvements when compared to those slumps.

The big question is when the chain can get back to setting sales and earnings records again on an absolute basis. Continued modest improvements like the one the chain just announced would mean McDonald's could reach that revenue mark in 2021. The profit rebound will take longer.

That means shareholders should brace for a volatile period ahead for the business, and for the stock, until the rebound path looks clearer by late 2021.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Demitri Kalogeropoulos owns shares of Chipotle Mexican Grill, McDonalds, and Starbucks. The Motley Fool Australia's parent company The Motley Fool owns shares of and recommends Chipotle Mexican Grill and Starbucks. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

eBay (NASDAQ: EBAY) investors had a fantastic 2020, with the stock price comfortably outpacing the broader market during the pandemic-fuelled e-commerce boom. Sure, companies like Amazon and Shopify posted wider gains. But eBay's nearly 40% share-price spike reflected some major operating wins and kept it ahead of other huge online businesses, including Walmart.

Investors are about to learn exactly how well eBay did in 2020 when the company announces its holiday season results. The strength of that performance, along with management's official outlook for 2021, will determine whether the stock continues its winning streak into the new year.

Let's take a closer look at the company in advance of the fourth-quarter earnings report's release on Wednesday, Feb. 3, and what investors should watch for.

Merchandise volumes and conversion rates

eBay's core growth metric is the volume of merchandise moving through its platform. Soaring results here formed the basis for last year's stock surge. Volume had been flat or declining in the quarters before the pandemic struck but shot up to over 20% year over year as commerce stampeded to online channels beginning in late February.

This quarter's report will answer big questions around the sustainability of that spike. Volume gains year over year slowed to 21% in Q3 from 29% in the quarter that captured the most intense period of retailing shutdowns. For its part, management in late October forecast gains in the low double-digit percentages. However, eBay easily surpassed its last quarterly outlook, and investors are hoping for another beat this week.

Other indications of healthy market share would show in an expanding buyer pool and robust conversion rates for its product pages. CEO Jamie Iannone should comment on both these metrics on Wednesday.

Cash and profits

eBay's asset-light operating model restricts its growth potential a bit as compared to Amazon, but the trade-off is higher profitability and impressive cash flow. Earnings more than doubled last quarter as operating margin surged thanks to the combination of higher sales, lower expenses, and an uptick in seller transaction fees.

Wall Street is expecting more gains ahead in this area, with reported earnings set to rise to $0.83 per share compared to $0.66 per share a year ago. But the more useful figure to follow is cash flow. eBay generated $584 million of free cash flow in Q3, and the company needs more success here to meet management's goals of investing in the business while paying down debt and sending more cash to shareholders through dividends and stock repurchases.

The 2021 outlook

Iannone and his team will be looking at an unusually wide range of potential results as they craft their official 2021 forecast. Organic sales likely increased by at least 20% in 2020 compared to their initial prediction targeting a flat result. That boost sets a high bar for growth this year, but it also gives the marketplace giant momentum in a quickly growing industry.

The good news is eBay already showed off a few impressive competitive advantages at a time when sellers were looking for new platforms they could use to connect with their customers during COVID-19.

The company's main challenge for 2021 is convincing these small businesses to stick around, mainly by making the platform more popular with buyers and easier for sellers to use. These successes are the key to eBay protecting its positive momentum in what's likely to be a competitive selling period ahead for the e-commerce industry.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Demitri Kalogeropoulos owns shares of Amazon. John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Amazon and Shopify. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends eBay and recommends the following options: long January 2022 $1920 calls on Amazon and short January 2022 $1940 calls on Amazon. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Netflix Inc (NASDAQ: NFLX) shares trounced the market in 2020 as the streaming video giant capitalised on soaring global demand for at-home entertainment.

Subscriber growth and engagement metrics jumped, and the business also posted rising margins and a dramatic – if temporary – improvement in cash flow trends.

Investors are bracing for a reversal of a few of those positive trends over the next few quarters as streaming demand settles back down to a more normal level. Netflix is predicting an unusually weak fiscal fourth quarter, for example. Yet CEO Reed Hastings and his team might still have plenty of good news for shareholders when they announce earnings results on January 19.

Let's look at the highlights.

1. Crossing 200 million users

Management warned back in October that part of the growth surge Netflix enjoyed through the first 9 months of the year involved pulling forward subscriber gains from future quarters. After having added 26 million subscribers in the first six months, it added just 2.2 million in the third quarter (compared to 6.8 million additions a year earlier). Netflix is expected to have added 6 million paying users in the fourth quarter to mark another rare slowdown from the prior year's 8.8 million additions.

The bigger picture is decidedly bright, though. Even if it just hits its projection, Netflix will have gained 34 million new users in 2020 to blow past its previous annual record of 29 million, set in 2018. It should end the year at just over 200 million paid memberships.

We'll likely get good news on the engagement front, too, given that Netflix already said it enjoyed record viewership over the holidays. New exclusive content like Cobra Kai, The Queen's Gambit, and Bridgerton all seem like major hits. These wins should support low cancellation rates for the service and higher average watching time, which form the basis for Netflix's regular increases to its monthly fee.

2. Negative cash flow

Investors got a rare treat in seeing Netflix's cash flow trend shoot into positive territory last year. That was mostly a quirk of the pandemic, though, which forced a pause on almost all content production spending. Still, the surging cash was a hopeful sign of the business's long-run potential.

NFLX Cash from Operations (TTM) data by YCharts

Cash flow is predicted to fall back into negative territory in the fourth quarter as production ramps back up. But Netflix is on pace to potentially reach the break-even point in fiscal 2021 before generating ample cash annually from that point forward.

3. The 2021 outlook

Hastings in late October said that the short-term outlook was weak even though the business is as strong as it has ever been. Customer additions should decline in the first half of 2021, executives have predicted, before returning to a more normal pace that reflects the many years of growth ahead in the streaming video industry.

There's plenty of uncertainty about what that pace will look like given all the changes to consumer entertainment demand in recent months. Yet Netflix is delivering increasing value to users, as reflected in growth in average viewing hours.

Success there, through better content and an improved service, is the company's surest path toward maintaining its dominant streaming lead. Investors should focus on that positive long-term outlook on Tuesday.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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Demitri Kalogeropoulos owns shares of Netflix. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Netflix. The Motley Fool Australia has recommended Netflix. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

eBay's (NASDAQ: EBAY) stock has enjoyed a strong rally so far this year. Investors were impressed with the online marketplace's surging growth trends during the initial phases of the coronavirus pandemic. They were just as excited about the prospect for improving profitability in late 2020 and beyond.

That optimism has set a high bar for eBay's upcoming earnings report, which is expected to show solid organic growth heading into the key holiday shopping season. Here are a few metrics to watch in the announcement set for Oct. 28.

Sales trends

The biggest questions surround the recent growth surge and to what extent it will hold up through the end of the year. eBay reported several encouraging numbers on this topic last quarter. Along with a basic spike in customer traffic as consumers shifted spending to online sources, the marketplace attracted many more sellers to its platform and had rising conversion rates along with sales growth across most of its categories.

Investors will be looking to see if eBay stretched those successes into July, August, and September, a period characterized by resumed retailing activities across most of the world. Wins here would show up in elevated sales volumes, which management predicted would grow by high-teen percentages in Q2. Also keep an eye on the buyer pool and whether it keeps rising at faster than a 2% clip.

Fees and cash

eBay entered the pandemic with far higher profit margins than its peer e-commerce giants, thanks to its asset-light approach to connecting buyers with sellers. That gap only widened in Q2, with operating margin jumping to 28.7% of sales versus 23% a year ago. The company is less exposed to the type of inventory write-offs that pinched profits at many physical retailers, and its marketplace also faces less risk around manufacturing and supply chains.

These factors all support robust returns, but transaction fees are the key metrics to watch when it comes to profitability. eBay kept the rate it charges buyers to roughly 9% last quarter as short-term promotions offset gains in other parts of the business. Even a tiny uptick in that metric would amplify earnings growth in the third quarter.

Looking out to the holidays

eBay lifted its 2020 outlook back in July, and investors have a good shot at seeing a similar boost on Wednesday assuming growth trends didn't disappoint. As it stands today, the company is predicting sales between $10.6 billion and $10.8 billion, equating to organic growth between 12% and 14%. For perspective, eBay was forecasting a roughly flat result on that metric before the pandemic struck.

It is smart to assume that growth will trend back down toward that pre-pandemic rate as the threat of the virus declines in the next year. But it's also clear that a large portion of the spending that consumers moved to online sources is here to stay. eBay's core challenge now is to convince its newest buyers and sellers to continue using the platform following a record growth year.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

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• 3 ASX ETFs with market-beating potential over the next 10 years
• Here are the top 10 ASX 200 shares today
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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends eBay and recommends the following options: short January 2021 $37 calls on eBay and long January 2021 $18 calls on eBay. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.