After last week’s stock market mini-crash, not every share price fell. In fact, some US stocks even surged on Friday when the major indexes were heading lower.
It’s not all that surprising though. Thinking back to 2020 when the pandemic first hit, certain stocks and sectors outperformed others. This pattern began to emerge on Friday when stay-at-home stocks rallied. These businesses could be about to benefit again if the new strain of Covid leads to more strict lockdowns.
Let’s see if there’s an opportunity here for my portfolio.
A US stock for video calling
The first company is Zoom (NASDAQ: ZM) as the share price popped almost 6% on Friday. However, this does mask an overall weekly fall of over 12% after its third-quarter results were announced, which I wrote about here. And it’s down over 50% year-on-year.
The main theme in Zoom’s results was a slowdown in the rate of growth. This is understandable given that workers have begun to return to offices, which lessens the need for Zoom’s video conferencing platform.
But does this new Covid strain change things, and will growth now begin to increase?
I’m not so sure. I do think it reinforces the need for Zoom’s platform and that subscriptions will be maintained. However, I don’t think it will accelerate growth to the levels the company achieved in the earlier part of the pandemic. Most businesses that need a Zoom subscription will likely have one by now, so a new strain of Covid may reduce the likelihood of customer churn more than anything. I then have concerns over competition, with Microsoft Teams being a prime example. Microsoft has improved its video conferencing capabilities over the past 18 months, so Zoom has a big competitor now. This wasn’t the case in 2020 when it was the clear leader.
I still like the economics of the business. It achieves high profit margins and is cash generative. But its high valuation puts me off as I don’t think this new Covid strain marks a significant turning point in its growth potential. It’s staying on my watchlist for now.
A stay-at-home fitness company
The next company is Peloton (NASDAQ: PTON). Its share price jumped almost 6% on Friday too. However, the stock has had a torrid time this year, and is down by 69% on a year-to-date basis.
Will this new Covid scare mark a turning point for the share price?
Again, I don’t think it will. The company manufactures and sells stationary bikes and treadmills for at-home fitness purposes. An added membership subscription means users have access to classes, and can compete against other Peloton equipment owners. It’s a great idea, and the share price boomed when gyms were shut.
But I just don’t think gyms will shut this time round due to Covid. We have vaccines now, and I think governments are generally against the sort of strict lockdowns they imposed before. The company is also still loss-making, and only forecast to grow revenue by 14% in fiscal 2022.
I could be completely wrong about Peloton, and the new Covid strain may mean revenue grows way more than current forecasts. This might be the catalyst for the share price to rally to previous highs around $160, which is significantly more than the $46 share price today.
But for now, I think there are better US stocks to consider.