20 March 2020

Netflix & Win Amid a Virus Market Crash

Tags

What’s happening: US stocks have swung wildly but been on a steep downtrend this month. In fact, the Dow has fallen more rapidly than it had during the 1929 market crash.

Companies gaining from coronavirus: Businesses are witnessing both a slowdown in demand and supply constraints. A near pause to the economy, due to cancelled events, travel bans, closed schools and curfews, demand has slumped. On the other hand, Shuttered factories and restrictions on the movement of goods have led to severe global supply chain disruptions.

Most companies are issuing warnings of missing their revenue and earnings targets this year, further dampening investor confidence. And, there stocks have plummeted. Even amid the larger market sell off, there are a handful of stocks that are still rising. Among these are Netflix and Zoom Video Communications. However, pressure remains in the near term.

Details: Coronavirus is spreading rapidly, and governments have encouraged people to stay home as much as possible. Lockdowns are commonplace and words like “self-quarantining” and “social distancing” have been added to everyone’s vocabulary.

Netflix is well positioned in the current scenario, as its viewership could increase. The company already has more than 160 million paying subscribers globally and earns about $20 billion in subscription fees. These figures may go up, as more people stay home due to coronavirus fears.

Even with a healthy subscriber base, Netflix is targeting only a fraction of people with internet connections worldwide. The pandemic nature of COVID-19 means that people are affected globally, giving Netflix a huge opportunity to scale its base. Moreover, with people being housebound, they are spending more time watching Netflix. This translates to higher subscriber engagement.

Zoom is benefiting as more people are opting to work from home. With a surge in remote teams, the need for collaboration tools has spiked. The Silicon Valley-based company has seen a massive increase in demand for its software, which provides virtual video conferencing.

Zoom has also witnessed an increase in sign-ups from students at all grade levels, as teachers continue to hold classes remotely. Even doctors are switching to video conferencing for their non-emergency appointments.

The company was already reporting robust numbers before the virus scare started. It reported strong earnings growth for the last three quarters, ranging between 275% and 800%. Zoom reported a whopping 1180% increase in its net income for the fourth quarter, with 78% revenue growth. Management also issued solid guidance for the first quarter and for fiscal 2021.

How the shares have performed: Shares of Netflix have gained almost 16% over the past six months. In the last five trading days, the stock has risen more than 5%. Shares of Zoom, which went public in April 2019, have surged 19% over the course of a month, while markets have been in freefall. The stock has climbed 82% in the last three-month period and 13% over the past five trading days.

Near-term pressure: The increased base can cause near-term pressure on both Netflix and Zoom’s infrastructure. The companies will need to spend on capacity building, which could pressure margins. For Zoom, this is more concerning, since a large part of the user base are not paid users of the application.

The Markets Today

     

Investors will be watching European stocks today, with the stocks finishing higher on Thursday amid high volatility through the session.

Context: European stocks closed higher in the previous session after the European Central Bank announced a new €750 billion “Pandemic Emergency Purchase Programme” and the Bank of England announced a further interest rate cut.

Details: Investor focus on the rising number of coronavirus cases in the region kept European stocks volatile for most of the session. Total cases in Italy have surpassed 41,000 with the death toll rising to 3,400. Spain and Germany have already reported a sharp rise in cases, which stand at over 18,000 and 15,000, respectively. Coronavirus has infected more than 244,000 people worldwide and has caused over 10,000 deaths.

At an emergency meeting, the Bank of England lowered interest rates to 0.1% and increased its bond-buying program to ease the economic impact of the COVID-19 outbreak. The central bank had earlier reduced rates from 0.75% to 0.25% on March 11.

The pan-European Stoxx 600 index closed 2.9% higher on Thursday, after delivering a strong recovery in the session. Telecom stocks climbed 5% to lead the gains. German 30 closed 2% higher, while French 40 rose 2.7%.

In economic news, Germany’s preliminary IFO business climate index dipped to 87.7 points in March, from a reading of 96.0 points in February.

Shares of cruise operator Carnival climbed around 18% to lead the gainers list among blue chip stocks. However, shares of Investec and Hammerson declined by around 13% each.

What to watch: Markets will be looking for support from the ECB and governments of European countries to combat the coronavirus impact. Investors are also hoping to see a decline in coronavirus cases soon. The Eurozone will be releasing its current account report for January. The current account surplus, which widened to €51.2 billion in December, is expected to shrink to €20.5 billion in January.

Other Markets: US markets closed higher on Thursday, with the Dow Jones, S&P 500 and NASDAQ 100 up 0.95%, 0.47% and 2.30%, respectively.

Support & Resistances
for Today

     

market snapshot

     

Futures at 0400 (GMT)

News shaping
the markets today

     

What else to watch today

     

Germany’s producer prices, Spain’s industrial new orders and balance of trade, Italy’s current account, the UK’s public sector net borrowing, Russia’s interest rate decision, unemployment rate, retail sales and gross domestic product, Turkey’s total motor vehicles production, India’s foreign exchange reserves, Mexico’s consumer spending, Canada’s retail sales, Brazil’s federal tax revenues and net payrolls as well as the US existing home sales and Baker Hughes crude oil rigs.

 

ADS Securities London Limited “ADSS” is an execution-only service provider. This material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or investment objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by ADSS that any particular investment, security, transaction or investment strategy is suitable for any specific person. To the extent that any content in this material is construed as investment research, you must note and accept that the content was not prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.  This material may contain links to third party websites, and any content, or use of your personal data by any third party websites is not the responsibility of ADSS or any member of the ADSS Group.