Some Winners Emerging from Stay-At-Home Economy

As the earnings season has kicked off we are starting to see some companies that are benefitting from the new economy and the stay-at-home orders issued by governments around the world. These companies aren’t benefitting from the pandemic in an unscrupulous way, but rather their business models have benefitted from people being home more or working from home.

Some of these emerging winners shouldn’t surprise us due to the modern world that we live in. Netflix (Nasdaq: NFLX) announced earnings on April 21 and the company reported earnings per share of $1.57 on revenue of $5.77 billion. The EPS fell short of the consensus estimate and revenue was slightly higher than the consensus. The EPS marked an increase of 107% on a year-over-year basis while revenue was up 28%.

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One of the key metrics for how Netflix is doing has always been new subscribers. For the first quarter, Netflix added 15.77 million new subscribers and that was nearly double what analysts were expecting. The company did warn that it expects to see a decline in the new subscriber rate as the “home confinement ends”.

Another company that is expected to do well with its earnings report is Amazon (Nasdaq: AMZN). The online retail giant is expected to report earnings on April 30 and the consensus estimate is for earnings per share of $6.34 on revenue of $72.92 billion. The EPS estimate is actually lower than the $7.09 per share the company earned in the first quarter of 2019, but the revenue estimate is 22.1% higher than the revenue from a year ago.

The story with Amazon has been the number of analysts boosting their price targets ahead of the earnings report. Goldman Sachs raised its price target to $2,900 from $2,600 on Thursday. Just a day earlier, Jeffries analyst Brent Thill raised his target from $2,300 to $2,800. When Jeffries raised its target to $2,800, it was a street-high target, but that title only lasted one day. Wedbush analyst Michael Pachter also raised his target for Amazon on Wednesday. Pachter boosted his target price from $2,325 to $2,750.

Target (NYSE: TGT) won’t issue earnings until May 22, but the company issued a mid-quarter update on Thursday. The report showed same-store sales were up 7% in Q1 and it was the online sales that gave the numbers a boost. In-store sales were actually down which is what one would expect under the circumstances, but the online sales more than doubled. The stock did drop after the announcement and that was because of an increase in costs. Target announced a raise of $2 per hour during the current crisis and that has hurt margins, but they are also selling more lower-margin items like food and beverages and other essentials.

One company that I personally think will see a boost is Microsoft (Nasdaq: MSFT). The software giant hasn’t gotten the attention that Netflix and Amazon have received, but I see the company benefitting from a couple of different sources. Microsoft is set to report on April 29 with analysts expecting EPS of $1.29 on revenue of $33.99 billion. Those estimates would mean an earnings increase of 13.2% and a revenue increase of approximately 11%.

I think we might see a positive surprise from Microsoft and there are two things that are behind my thinking. First, I have spoken with a number of people that are using Microsoft Teams, the communication and collaboration platform that is part of Office 365. We saw video chat firm Zoom Video Communications (Nasdaq: ZM) get a boost when the lockdowns started, but then there were security lapses that were exposed. Zoom’s stock has done quite well, but I think investors are underestimating how much Teams might help boost Microsoft.

The second aspect of this is that I wouldn’t be surprised to see a boost in subscriptions to Office 365 as a result of people working from home. I will admit that I am one of those people that’s still operating on an old Office platform and haven’t updated in years. But how many people like me had to upgrade their computers in order to be able to work from home effectively? I am guessing a great number of people had to subscribe to Office 365 in order to be able to work from home.

Obviously, there are areas of the economy that are struggling during the economic shutdown—energy, banking, restaurants, etc. But some companies are benefitting from the shift in the economy. Sure some of these benefits may be temporary, but I don’t think our economy is going back to “normal” anytime soon. Even when the different levels of government give the okay, everything isn’t going to go back to the way it was in January.

I expect a number of companies will continue to work from home for a while or they will bring people back in slowly—a few layers at a time, so to speak. I don’t think restaurants are going to open the doors and then be packed on that first night. People are going to be cautious about resuming their lives with the uncertainty about the coronavirus.

About Rick Pendergraft

Rick has been studying, trading, analyzing and writing about the investment markets for over 30 years. He has worked for some of the largest financial publishers in the world and he has been quoted in the Wall Street Journal, USA Today, the New York Times and the Washington Post. In addition, he has been interviewed on Bloomberg, CNBC and Fox Business News. Rick’s analysis process includes fundamental, sentiment and technical analysis. Rick started college as an education major, wanting to teach economics, but eventually changed to majoring in Economics and received a Bachelor of Science in Economics from Wright State University. His desire to inform and educate people is at the heart of his writing.

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