Pandemic Stocks, Sell, Buy or Hold?
1. Netflix Inc (NASDAQ:NFLX)
On 19th April 2022, during the Q1 earnings season of 2022 Netflix Inc became the star of the show, unfortunately, it was a horror movie.
The company’s management announced that for the first time in over a decade, subscriber numbers had fallen. The loss of 200,000 customers was unfortunate enough but made even worse by the fact that the firm had given guidance that subscriber numbers were expected to be up by 2.5 million. Analyst predictions put the number of new subscribers in the region of 2.7 million, and as a result of this huge miss, the stock price of NFLX unsurprisingly cratered. It was down 25% in the first trading session after the announcement and one week later had lost almost half of its pre-announcement value.
Potentially most worryingly for shareholders is the NFLX price, which peaked at $696 in November 2021 is now trading at $191 and below the low of March 2020, which marked the start of its COVID-led bull run. The COVID premium has been completely wiped out.
Netflix Inc- Daily Share Price Chart 2019 – 2022 – Boom and bust
Is this a buying opportunity? Well, not yet. The sector Netflix operates in has changed dramatically since it was the ‘go-to’ streaming service for those in lockdown. New and considerable challengers, including Disney, have waded into the streaming market, the world’s population have resumed meeting face to face, and inflationary pressures are making viewers choose between streaming rivals.
A Crowded Sector
The lockdowns of 2020 and 2021 meant Netflix customers were restricted to their sofas but so too were film production crews. Social distancing constraints and production difficulties have resulted in an air gap in the pipeline of the high-quality new programs which Netflix customers expect. This situation is made worse by the fact that rivals such as Disney have a much stronger back catalogue of readily available ‘classics’. Netflix shows are highly acclaimed, but the decision making in terms of what service to keep or lose is being made now and could be a one-way street for many customers.
Reforms of the way in which user log-ins are shared are on the cards, but there are serious question marks about how effectively stricter terms can be enforced. With the cost of living spiralling, the Netflix management couldn’t have chosen a worse time to ask users to question whether they really need the service. The challenges facing Netflix are many and varied and cut to the heart of their operations, and for that reason, NFLX is a sell.
2. Zoom Video Communications Inc (NASDAQ:ZM)
Between March and October 2020, video conferencing service Zoom saw its share price rise by an eye-watering 420%. Unfortunately, it’s been all downhill from there and the ZM stock price breached the key $100 price support level in April 2022.
Zoom – Daily Share Price Chart 2019 – 2022 – Undervalued
Zoom’s share price slide has been part of a broader sell-off in tech stocks, but the stock is beginning to look undervalued. Investors bailed out of tech stocks in Q1 2022 due to the risk of inflation eating into consumer spending, but Zoom’s corporate client base can be expected to think differently and treat Zoom as a necessary expense.
The fundamentals are holding up and Zoom generated around $4bn in revenue in 2021, and its profit margin is an impressive 29.2%. It is also worth recalling some of the reasons early-stage investors tipped the stock before the events of 2020.
Long-distance corporate travel appears to be back on the agenda. Renewing business relationships with face-to-face meetings will be a priority following COVID lockdowns but will that trend be sustained or will the inefficiencies and inconvenience of long-distance travel come back into play after initial meetings are completed. In the last two years, there has been a paradigm shift in terms of acceptance of videoconferencing use and Zoom still commands almost 50% of the global market for video call platforms.
It might be time to find a middle ground between online and physical meetings, but it’s debatable whether corporate clients are going to cancel their Zoom subscription just because some of their staff are now sometimes going to the airport.
Zoom’s free accounts for personal use were always a loss-leader to allow new users to familiarise themselves with the platform’s functionality which still beats that of its major rivals. Video conferencing was always a good idea but was just overplayed during the pandemic.
One potential kicker for Zoom is the fact that oil prices are now far higher than when the pandemic first hit. The additional costs associated with travelling to meetings could well be a convenient excuse for executives to suggest that their next meeting is on Zoom rather than face-to-face.
The problems Zoom solves have, in some instances, become even more pressing in the last two years and the firm and the firm’s commitment to keep latency under 150 milliseconds means that conversations on the platform still appear natural.
We’re positive about the prospects for Zoom but feel there’ll be more selling pressure before it’s time to buy the dip. Averaging into positions is recommended until the tech sector as a whole stabilises, but from that point, adding to positions by using a momentum based strategy will help catch the upwards movement in the stock.
We will also be keeping a close eye on tech and functionality upgrades from rival firms, which might knock Zoom off its position as the most user-friendly video conferencing service. But until that happens Zoom is a buy.
3. Gilead Sciences (NASDAQ:GILD)
Gilead Sciences was one of the early winners during the COVID pandemic. Its share price started surging in January 2020 as investors recognised the firm’s anti-viral medication was soon to be in much demand. Between 3rd February and 16th April 2020 GILD stock increased in value by 39.78% but before the year was out the stock was back trading below pre-pandemic levels as market interest turned to vaccine makers.
Gilead Sciences – Daily Share Price Chart 2019 – 2022
Since that time, Gilead stock has traded in a relatively wide trading range between $57 and $74 per share. From a technical analysis perspective, there are signs that the price support found in the region of $56 looks like a solid basement level price for the stock and the price chart is also showing the formation of a double-bottom price pattern.
The fundamentals make it an attractive proposition at any price below $60. Gilead’s dividend yield is currently 4.8% and the normalised P/E ratio of 12.28 is very low for a stock in the bio-tech sector, where the average forward P/E ratio is calculated by Stern University to be 146.61.
Gilead Sciences – Daily Share Price Chart 2019 – 2022
Gilead’s involvement in COVID related treatments remains limited by more effective alternatives being available, but the firm never pitched itself as a COVID stock. Even before the pandemic hit, Gilead had been charting a course towards oncology treatments and these could hold the key to unlocking future value for shareholders.
The oncology R&D team at Gilead has 27 clinical-stage drugs coming through the pipeline. This supply being bolstered by the purchase of Kite Pharma in 2017 and Immunomedics in October 2021. The company only started paying dividends in 2017 but has since then become known for returning cash to investors and that recategorisation away from a growth stock and towards it being a high-yield stock.
This overhaul of their business operations will take time to work through. Even if it is successful, the future revenue streams are still some way away and the prospects of Gilead are balanced between its old and depreciating drug portfolio and its new pipeline. This all adds up to make Gilead a stock to keep on your watchlist and if you’re already in a position to hold rather than one to actively buy or sell.
What You Need to Know About Pandemic Stocks
The above analysis is based on new COVID variants not being as extreme as the earlier ones or herd immunity via vaccines and infections being enough to ameliorate the impact of new strains. Based on the data of the last 12 months, this does appear to be a safe enough call, but expert advice warns against complacency.
The UK government’s chief scientific adviser Sir Patrick Vallance was speaking in February when he said, “we expect there to be more variants and they could be more severe” (source: Evening Standard). Speaking in January Dr. Anthony Fauci the White House medical adviser on the coronavirus “The worst-case scenario is we’re on our way there and we get hit with another variant that actually eludes the immune protection” (source: Deseret News).
Seasonal Infection Rates
It is also worth factoring in seasonal infection rates. Hard data has already been established that COVID, like flu, spikes during winter months and that means the above pandemic stocks can also be expected to experience seasonal peaks and troughs in demand. It doesn’t require a full lockdown for there to be a shift back to online living, a hotspot of infections involving a new strain would likely be sufficient to increase interest in Zoom and Netflix.
How to Trade Pandemic Stocks Online
1. Find a Broker
Rule number one of successful investing is ensuring you set up with a reputable broker. Reliable firms found on this shortlist of trusted brokers are regulated by some of the most highly regarded financial authorities. They’ve also been reviewed by the AskTraders team to ensure they offer T&Cs which allow for cost-effective trading.
If you’re looking to sell short pandemic stocks such as Netflix, you’ll need a broker which offers CFD trading services. Buy-and-hold investors who think Zoom is currently undervalued will find a share dealing service is more cost-effective. Whilst CFDs have greater flexibility, they do also come with daily financing charges, so if you’re looking to hold a long position for more than a few weeks buying the stock outright is usually more cost-effective. Further analysis of the pros and cons of trading CFDs and shares can be found here, but the good news is that most of the top-tier brokers offer both services from the same account.
3. Open & Fund an Account
Setting up an account is done online and takes a matter of minutes. It’s a straightforward process and once you’ve provided the required ID, you’ll be able to wire funds to your account with some payment options involving immediate transfer of funds. Most good brokers don’t charge any commissions on cash transfers, so checking the T&Cs can help you avoid unnecessary costs.
Instruction to Buy 22 Shares of Zoom
4. Set Order Types
Whether you are buying long or selling short both strategies can take advantage of risk management tools, including stop-loss, take-profit and limit orders. These are instructions set into your account to automatically buy or sell at pre-determined price levels. They help ensure a bad trade doesn’t blow up your account and also help instil discipline into your trading.
Automated orders can help those looking for a hands-off way of trading, but some long-term investors decide to not use stop-losses in case a momentary price fall results in them being kicked out of a position that ultimately comes good. Instead, they use alternative risk management techniques such as trading in small size and portfolio diversification.
5. Select & Buy Shares
To buy the shares you want, simply navigate the trading dashboard to the dealing page for a stock and enter the quantity of shares you want to buy and click ‘Place Deal’. At that point, you’ll exchange an amount of cash for a holding in a pandemic stock which will go up and down in value in line with the market price. When the time comes to close out your position, simply reverse the process and crystalise your trading returns.
Whether you are an experienced or novice trader navigating to one of these trusted brokers will take you to a reliable and user-friendly trading platform. The functionally of online broker sites is extremely user-friendly and the free support services offered include research reports, news feeds, price alerts and analyst recommendations which combined will get your trading off to the best possible start.