When the world goes through and extremely tough test, it emerges stronger. It is human nature to get ready for the next potential disaster. Unfortunately, life has a way of giving us the test first so we can learn a lesson from it. Today, we will discuss owning pandemic stocks for the next decade.
These are companies whose equities benefited from the rush to cyberspace. When we couldn’t leave our homes, we went to the cloud.
They say to not let a crisis go to waste. Last year, the world suffered a tremendous blow from a massive pandemic. The human and financial tolls were huge. We are still dealing with the aftermath albeit on better footing now. We’ve learned about flaws in our systems. We paid dearly for them but are on the upswing out of it.
Wall Street quickly recovered after a massive crash in March of 2020. It then went ahead and set new record highs mostly on the back of stocks like the ones today. Amazon (NASDAQ:AMZN) is the highest profile beneficiary of the global shutdown. We needed our stuff delivered, Amazon served its purpose.
Streaming stocks also played their part and are part of today’s thesis. When we were stuck at home with no jobs we consumed more media than ever before. Even those who have been resisting cutting cords had to learn the process – and quickly. Lastly, infrastructure strategists will need to plug the hole we had in transportation. We could have another lockdown and most likely, it will be involuntary.
In short, the world developed habits that are likely to linger long after the novel coronavirus crisis. The three pandemic stocks in focus today are:
Pandemic Stocks: Zoom Video (ZM)
Zoom Video was the poster child of pandemic stocks. It is only fitting to start with the one that exemplified the whole concept. Zoom stock soared 670% after the February 2020 bottom. There was an absolute panic to meet online because there were no other alternatives. The entire world crashed the doors of Zoom and the race was on.
It is an absolute miracle that the company stepped up to the plate relatively smoothly. It has since become a verb for video calling. The company has since earned the first-mover advantage – and that’s likely the linger for years. Netflix (NASDAQ:NFLX) enjoys the same privileges and they do extend to the trading floor. The rally in ZM stock was extremely fast, so it’s not a surprise to see it crash from its highs.
This doesn’t speak to the change in benefits. Investors more often than not overdo it in both directions. Somewhere in the middle always lies the truth, and that’s the opportunity ahead. It was wrong to chase it into $600 per share. And it is unreasonable to expect the complete reversion to the lows. It is now at exactly at 50% of the Fibonacci retracement level of the entire pandemic rally. Giving back that much is part of normal price action in the long run.
The bulls may struggle a bit with it here, but this is their chance to establish a baseline. The fact that markets are at all-time highs they add a level of risk extrinsic risk. I expect the near-term trading range to have a solid base at $280 and resistance above $350 per share.
I hated its financial metrics on its way up . The buyers were too optimistic pricing in 120 years worth of sales ahead of time. Those metrics are back in line, in fact, they are humble enough to be attractive. The income statement of ZM stock is on solid footing. Onus is on management to prove they can sustain it going forward.
This next earnings report will be important toward that. If they show mere stabilization it would be good news for long-term prosperity. Zoom stock now has an impressive net income and reasonable price-to-earnings and price-to-sales ratios. They are no longer a potential disaster waiting to happen.
The company’s user base is large enough to work on financial stability and execute on plans. This is a winning combination that could pay dividends for the next decade. Telecommuting and other functions online are now part of the norm. These are exciting times for this leader in serving those functions.
Covid-19 forced everyone into seclusion. There was little left to do but watch the world through screens. We consumed media by streaming it non-stop. Demand for video content ballooned and Fastly played a big part in delivering it. This trend is likely to linger for a long time, so demand is sustainable. This is the speculative bet of the three pandemic stocks for today.
Investors saw the potential in FSLY stock and it soared into a 500% summer rally. As they neared $136 per share, the bulls ran out of steam. It is now resting 70% below the high-water mark, but not likely for long. In the last few months it has had multiple rallies more than 50% each. Clearly, this stock is not for the faint of heart, and owning it requires conviction.
I gather confidence in my trades from facts. The income statement for FSLY is pretty attractive. They tripled their total revenues in the last four years. Its price-to-sales ratio is only 16, which is reasonable for a growth company. Some of these statistics will need to normalize over the next few quarters. The effects of the pandemic distorted many profit and loss statements. Covid-19 stocks received an artificial boost, so pressure is on management to show they can sustain it.
They just reported earnings and investors reacted very negatively to the headline. The stock fell 30% after it had just finished a 50% correction. There is no respect for the financials in the report card yet. But this is often where opportunities lie. Successful investors find value while others panic. The idea is to buy FSLY stock when it’s still out of favor.
The baseline of the rally last year was under $30 per share. From that perspective there could be more downside. If the bulls fail to hold the recent lows they will trigger another wave of selling. Smart investors accumulate positions over time and owning FSLY at these levels makes for a good start. Going all in is a mistake, especially when the entire stock market is near its all-time highs.
Pandemic Stocks: GoPro (GPRO)
Part of the reason Tesla (NASDAQ:TSLA) caught fire is its innovation. At the heart of that thesis lies its foray into self-driving technology. Self-navigating machines will be part of our future. For that they need eyeballs to work, and GoPro excels at this tech. GPRO stock could be ready to fly once again into 2022.
In 2014, the company captured Wall Street’s heart as it almost hit $100 per share. Some experts went as far as calling it the YouTube killer. That marked the very top of the stock and it collapsed in a fantastic fashion. Since then, the P&L has been lackluster but still the stock could be a sleeper.
The pandemic bottom helped it flush out a floor. From it came a 600% rally and positive momentum. But also because we now know that lockdowns can happen, GoPro could play a new role. Machines that guide themselves will need eyes. GPRO stock could be in play from that perspective. There are other competing technologies like radar and lidar. Tesla recently committed its guidance systems to cameras, and this gives credibility to my thesis over the other two techs.
This is not the case of one winner takes all like VHS and Beta-max. The need for guidance systems will be huge. Most viable technologies will have a legitimate chance at taking a piece of the action. Technically, GPRO stock failed to break through $14, so that is waiting to be the next trigger. If the bulls can take it out, they could ignite another mega-spike this summer. The sooner they do this, the better while the members of the gang on Reddit are still active.
On the date of publication, Nicolas Chahine did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Nicolas Chahine is the managing director of SellSpreads.com.