The novel coronavirus pandemic flipped the markets on their head. Companies once considered safe bets are now trading at their 52-week lows. Profits are down, and the future is looking more and more uncertain. But it’s not all doom and gloom, especially for those stay-at-home stocks tailor-made for a Covid-19 environment.
For several companies, Covid-19 is functioning like a tailwind. Services that were once-considered ancillary, like video-conferencing and chat applications, are now essentials of the new normal, post pandemic. And although the race for a vaccine rages on, there is no telling when the current crisis will end. A possible second wave in the coming weeks of autumn is also stoking fears and sending stay-at-home stocks soaring upward.
Hopefully, if we manage to get this crisis behind us before the end of the year, the markets will reward companies struggling. Before that happens, though, stay-at-home stocks will continue to make substantial gains. However, once this crisis is over, we can expect valuations to normalize.
If you’re an investor who finds current multiples a bit jarring, then it would be best to wait it out, since these stocks will start to fall back a bit once we have a vaccine, hopefully by January next year.
Here are five stay-at-home stocks that are leading the charge but will eventually cool down:
- Zoom (NASDAQ:ZM)
- Netflix (NASDAQ:NFLX)
- Slack Technologies (NYSE:WORK)
- DocuSign (NASDAQ:DOCU)
- iBio (NYSEAMERICAN:IBIO)
Stay-At-Home Stocks: Zoom (ZM)
The pandemic has completely changed the way we do business. Airlines and cruises are getting the hammer as people are traveling less due to the virus. That’s why you are seeing shares of American Airlines (NASDAQ:AAL), Carnival (NYSE:CCL), and Norwegian Cruise Line Holdings (NYSE:NCLH) losing steam.
However, people still need to see their relatives, and they also need to visit other states and countries for business. That’s where Zoom comes in, with its video conferencing tools. The company is a significant disruptor of traditional enterprise work culture, and ZM stock is reaping the benefits.
Shares are up a staggering 538.4% year to date, and they should climb higher since they are still trending 52-week highs. Total revenues in the most recently reported quarter were $663.5 million, up 355% from the year-ago figure of $145.8 million, beating the company’s higher-end guidance of $500 million.
Considering all the positive developments, it should come as no surprise that ZM stock is trading at 284.22 times its forward price-to-earnings, an 833.94% premium to the sector average — certainly not cheap. Now I am not saying that shares are a terrible investment, but they are running hot for a stock that was pretty obscure before the pandemic.
Also, while business meetings on Zoom are great, I don’t think they will completely replace one-on-one, face-to-face sessions. We’ve already seen vacation demand return in the summer, and hopefully, once we have a vaccine, we will see business travel stage a comeback as well. That should have a knock-on effect on ZM stock and push it down somewhat. That would be an excellent time to add more ZM stock to your portfolio.
Although Netflix was pretty popular before the pandemic, the phrase “Netflix and chill” took on a whole ‘nother meaning due to the virus. With millions of people shuttered into their homes, there was little left to do, other than catch up on your favorite shows or watch new ones.
Entertainment companies that required social gatherings of some kind are feeling the heat during these times. But the streaming model perfected by Netflix is now the envy of the entertainment world. The success of the catalog is down to the investment the company makes in producing original high-quality films and series.
In 2019, the company spent $15 billion on new content. Disney (NYSE:DIS) is the leader in dollars paid for new content, though, with $27.8 billion reserved for new series and movies. However, Disney+ is still a newbie in the game in comparison to giants like NFLX. Many companies in the space are trying to catch up, which seems improbable by the kind of market share they have.
NFLX stock is trading at an almost 20% discount to its 52-week high of $575.37 per share. Consensus estimates show that shares will rise at least 10% in the coming 12 months.
People aren’t rushing to theatres, and that’s why streaming services are raking in the moolah. We already saw what happened to Christopher Nolan’s Tenet, which did not move ticket sales much despite a massive advertising push, a stellar cast and great reviews.
But there is a caveat here. NFLX is doing exceptionally well, but with the reopening of live entertainment venues, subscription growth will slow from the pandemic heights it hit.
Shelter-in-place gains won’t evaporate — Netflix has a relatively low churn rate of 11% — but they will force the company to invest more in original content. Competition is also ramping up in the scape, ultimately leading to a fracturing of the market — there is only so much you can watch.
Slack Technologies (WORK)
Despite excellent second-quarter results, WORK stock slid 20%, puzzling long-term investors. Both top- and bottom-line results smashed estimates by a fair margin, but billings came up short of estimates. As InvestorPlace‘s Bret Kenwell mentioned, that little factoid was the main reason shares fell as much as they did.
In the recently concluded quarter, Slack generated $10.7 million in free cash flow. That compared quite favorably with the $7.8 million in free cash outflow in the year-ago period. Even before the pandemic, Slack had become a favorite tool for use within significant companies. Although Microsoft’s (NASDAQ:MSFT) Teams has taken away a slice of its business, Slack remains the premier tool people use for internal communications.
Now that I’ve talked up the stock let’s talk the biggest issue with Slack — valuation. Shares are trading at 17.28 times forward price-to-sales, a 463.67% premium to the sector median. Slack has outperformed the S&P 500 index in the past six months. It has also gained tremendously due to the pandemic and widespread work-from-home policies. But the stock is now too expensive. Long-story-short, it would help if you waited for more of a correction before jumping in.
One of the big winners of this pandemic, DOCU stock is up almost 154% in the last six months.
The San Francisco-based company allows organizations to manage electronic agreements through its cloud-based technology. It’s no surprise the company’s platforms are experiencing an increase in traffic. The pandemic has led to companies either wholly or partially, digitizing their workflows.
Even without the pandemic, the company would still be growing. Businesses all over the world realize the importance of becoming greener and replacing paper-based processes. However, there is no denying that the pandemic exacerbated the whole process and drove subscription numbers through the roof.
The first quarter saw total customers increasing to 661,000 from 508,000 in the year-ago quarter. Revenues came in at $297.02 million, beating estimates by $16.18 million. So, the company is heading in the right direction.
However, like other entries on this list, DOCU stock trades at a steep premium to the sector average. Despite not generating a penny of GAAP profits, it has a rich valuation of $39.32 billion. Any stock that trades at 27.27 times forward price-to-sales is certainly not cheap.
With growth priced in, all we can do is for shares to cool off a bit before jumping in. As I’ve said, DocuSign is a transformational technology company that eliminates paper-based processes in several industries. But shares are not offering great value at current rates.
The last entry on the list may seem to come out of left field. A day trader’s delight, iBio stock started to gain traction earlier in the year, and its gains are purely down to Covid-19 and its impact on the markets. You increasingly see this in the biotech sector.
Unfortunately, this has led to unprecedented valuations for several biotechs, which may or may not deserve all this fanfare — case in point, iBio stock, which is up 594% year-to-date.
The situation is not new for the Newark, Delaware-based biotech, which found itself in much the same position after the Ebola virus struck in 2014. Unfortunately, the company could not come up with a solution then, and it doesn’t look like they will come up with one this time either.
Then why is the bull run taking place? Well, that’s down to the frenzy surrounding the medical sector in general at the moment. Investors, the general public, indeed, the entire world wants to see the back of the COvid-19 crisis. Hence, the gains are natural, and stocks like iBio will continue to skyrocket for the foreseeable future.
Still, we are starting to see the cracks appear as clear frontrunners emerge. iBio stock trades at $2.08 per share, a far cry from its 52-week high of $7.45 a pop. But unlike the other entries on this list, this stock does not offer any long term value.
On the date of publication, Faizan Farooque did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. Faizan has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio.