Use market weakness to buy tech and financials: Wells Fargo Strategist
Wall Street analysts are rushing to name companies that could benefit from the COVID-19 outbreak and the resulting economic downturn. Research firm MKM Partners put together a basket of “stay at home” stocks that includes Slack Technologies Inc. (up 13 per cent last week) and the once-wobbly exercise equipment maker Peloton Interactive Inc. (up 17 per cent).
Jefferies analysts have blessed companies with “strong balance sheets,” and decreed cash-rich Facebook (down 12 per cent) and Google (down 12 per cent) well-positioned for opportunistic acquisitions and stock buybacks.
But let’s face it: There are no winners in a global pandemic that has already caused more than 325,000 confirmed infections, 14,370 deaths and billions in economic damage. Instead, let’s divide technology companies into the thriving, surviving and suffering, and look at the factors that will lead some of them to navigate the storm more adeptly than others.
Among the thriving, the obvious candidates are e-commerce companies like JD.com Inc. (down 5 per cent), Amazon.com Inc. (up 3 per cent) and Walmart Inc. (about flat); telecoms that are keeping their pipes from bursting; and food delivery services such as DoorDash and Postmates Inc., which represent “a rare bright spot in harrowing economic times,” as we wrote on Friday.
The videoconferencing maker Zoom Video Communications Inc. (up 21 per cent) offers a crucial way to collaborate from home and now has the No. 1 app on the Google Play Store. And the social app for neighbors, Nextdoor, has seen an 80 per cent increase in engagement according to CNN.
While Zoom rents space in 19 data centers, it also relies on two other members of the thriving class: Microsoft Corp.’s Azure and Amazon Web Services. Amazon also supports the vital quarantine-survival services Netflix Inc. and Hulu.
To the thriving list, I’d add social media hangout apps Houseparty and Marco Polo, both surging in the iOS and Google Play app stores. Unlikely lifelines have also been extended to meal-kit maker Blue Apron Holdings Inc. (up 345 per cent last week!) and the cannabis-delivery service Eaze, which seemed in danger of going out of business in January and now seems to be, well, rolling in orders.
Personally, I think Alphabet Inc.’s Google and Facebook Inc. are going to be members of the middling survivor class. People are looking for reliable information about the virus and to connect with extended family and friends. But the online advertising market is likely to wither in a recession.
And while WhatsApp traffic soars, Facebook’s Instagram service suddenly feels surprisingly vacant—perhaps no one is “living their best life” right now?
Also surviving is Apple Inc. (down 18 per cent), which maneuvered through three months of supply challenges, though it’s difficult to imagine that battered consumers are going to be ready to pony up for premium devices when this is all over. Intel Corp. (down 16 per cent) is in this group as well; demand for PCs is crashing, but the rush online should provide a boost to its profitable servers business.
Unfortunately, the list of sufferers is long. Lyft Inc. (down 12 per cent) and Uber Technologies Inc. (down 6 per cent) are taking a beating as people stop taking rides, though Uber has the comfort of its cash position, as well as food delivery unit Uber Eats. The virus is an absolute nightmare scenario for Airbnb Inc., which had hoped to go public this year, and other tech travel companies like Expedia Group Inc. (down 30 per cent) and trip giant Bookings Holdings Inc. (down 17 per cent), owner of the now largely useless restaurant reservation app OpenTable.
Payment companies like Square Inc. (down 34 per cent), PayPal Holdings Inc. (down 21 per cent), Stripe Inc. and Brex Inc. are also all likely to suffer as retail transactions decline.
Circumstance is playing a pivotal role in this equation of who succeeds and who fails during the Covid-19 outbreak. But there are a few rules to glean from the list. The first is: In times of war, supply chains are always a crucial factor. Companies with durable relationships to reliable suppliers can continue to prosper. On the other hand, relying on contractors, volunteer hosts or armies of freelancers during a crisis seems tenuous at best.
The other lesson is that decisive leadership will matter. Last week Amazon announced the hiring of 100,000 workers and said it would limit the inflow of non-essential items in its warehouses. Walmart announced it was hiring 150,000 and rolled out testing sites at their stores. In effect, both are turning massive operations around on a dime. Amid the global pandemic, companies have to look for new strategies, and perhaps ways to raise money or cut their burn rate dramatically.
Good stewardship will only go so far, though, and with global business now more interconnected and interdependent than ever, unadulterated success will be rare. If the economy continues to deteriorate, we’re likely to find out that no company is immune.
If you read one thing
Airbnb's board is considering a range of options for how to deal with the pandemic. Potential strategies include raising more money from investors, revising plans for its planned stock market debut and trying to snap up other struggling travel companies. The company has already been approached by a dozen potential investors.
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