While countries are taking different approaches in combating the rapid spread of the coronavirus, the disruption is everywhere, and is permeating almost all aspects of daily lives. The markets have plunged alarmingly, with businesses and industries reeling from the fallout. This, naturally, begs the question: Is a recession on the way?
While the circumstances are entirely different from the previous recession - in 2008, the recession was brought on by a banking and housing crisis, as opposed to today’s unforeseen coronavirus pandemic - the results could ultimately have the same impact on the economy.
With this in mind, RBC’s Mark Mahaney has been assessing the effect a recession could have on the names under the investment firm’s coverage. While some are already feeling the financial impact, the 5-star analyst tells investors that there are three stocks in a particular that are set up well for such a scenario.
We ran Mahaney's favorite stocks through Tipranks database to see if the rest of the Street’s take aligns with the 5-star analyst’s. The data revealed that in addition to boasting Buy ratings, all three have the potential for double digit upside in the next twelve months. Let’s take a deeper look.
Amazon (AMZN)
Internet retail behemoth Amazon is under pressure these days, but not because its business is under duress due to the outbreak’s negative effect. On the contrary, it is in extra demand. In a macabre sort of way, people staying in is a good turn of events for Amazon. As shoppers are reluctant to venture out into crowded spaces, and as stores find it increasingly difficult to provide concerned consumers with adequate supplies, the public is turning to a company extremely well set up to deliver product on time, with one day delivery services and an almost unrivalled logistics infrastructure.
You could even make the case that should the dreaded scenario of a global lockdown occur, Amazon could further benefit. Mahaney thinks so, too, and reckons Amazon should be one of the companies to come out unscathed from a recession as it is more resilient than ever before.
The analyst expounded, “Amazon maintained one of the most consistent Revenue growth rates throughout the period of 2007 to 2009 (see later exhibit). We would argue that Amazon may be more recession resistant today than during the GFC for three reasons: i. AMZN’s retail sales have skewed materially away from consumer discretionary spend towards consumer staples; ii. Its well-established Prime subscription plan likely translates into more consistent customer spend; iii. The material rise of AWS over the last decade has substantially reduced it cyclical exposure – given the technology / cost advantage of Cloud computing.”
With this in mind, the 5-star analyst stayed with his Outperform rating on Amazon. From current levels, investors could be taking home a 60% gain if Mahaney’s $2,700 price target is reached within 12 months. (To watch Mahaney’s track record, click here)
The Street concurs. Out of the 39 analysts tracked over the last three months, 1 recommends a Hold, while the rest say Buy, making the consensus rating a Strong Buy. The average price target hits $2,430.54, and suggests upside potential of nearly 44%. (See Amazon stock analysis on TipRanks)
Netflix (NFLX)
From the A in FAANG, we move one step forward to the N. In a similar manner to Amazon, Netflix has outperformed the broader market since the outbreak began. While the streaming giant is down by 9% year-to-date, it has taken less of a beating than the S&P 500’s 26% drop.
The case for Netflix’s recession proof status is a simple one. Netflix’s army of global subscribers number 167 million, paying a combined $20 billion for the service, way more than for any one of its rivals. This paved the way for a $15 billion outlay on content last year, with more to come in 2020. The heaps of new content should increase the amount of subscriptions, leading to more revenue which gets reinvested in new offerings, leading to additional subscribers and round it goes. It’s a simple, yet very effective formula that has worked so far.
While other analysts have pointed out that due to Netflix being a subscription based service, it won’t benefit from people staying in, Mahaney begs to differ. “Netflix offers safe at-home entertainment amid public concerns about physical exposure to large groups, such as at movie theaters,” he commented.
The analyst added, “Netflix’s high-value, low-cost value proposition and subscription-based model likely sets the company up for a relatively stable revenue stream. Netflix’s revenue growth was one of the most stable throughout the 2007-2009 Great Recession… Our long thesis remains very much intact with strong Global Sub Adds, robust ex-FX Global Streaming growth, rapidly ramping Op Margins, and improving FCF."
Based on all of the above, the 5-star analyst kept his Outperform rating as is, along with a $420 price target. The implication? Possible upside of a further 40%.
Looking at the consensus breakdown, 22 Buys, 7 Holds and 3 Sells add up to a Moderate Buy analyst consensus. The potential upside comes in at 27%, should the average price target of $380.73 be met in the months ahead. (See Netflix stock analysis on TipRanks)
Spotify Technology (SPOT)
In a similar vein to Netflix, Spotify’s ascent has disrupted a whole industry. As the music business belatedly came to grips with the impact of the internet and mp3 file sharing, the music streaming service’s almost bottomless offerings of new, old and rare music has been a complete game changer.
The company’s latest quarterly report, though, was a mixed affair. Revenue of €1.86 billion came in 2% below the Street’s estimate, with the shortfall blamed on lower than expected ARPU (average revenue per user). The bottom line disappointed, too, as EPS of -€1.14 missed by €0.78. On the other hand, gross margins of 25.6% landed ahead of the Street’s call for 25.2%, and total MAUs (monthly average users) grew 31% year-over-year to 271 million, outperforming the high end of the company’s guidance.
Mahaney notes that 90% of Spotify’s revenue comes from premium subscriptions. The company posted a record-high 28 million premium subsriber net adds in FY19 and a record-low 4.0% churn in Q4, which the analyst thinks “underscores the robust growth and quality of its revenue.”
Additionally, Mahaney recently hosted Spotify CFO Paul Vogel at the company’s virtual Rally in the Alley. According to the analyst, Spotify management believes that most likely, consumer demand for music streaming will not be adversely impacted by COVID-19. In fact, the company may possibly benefit from people staying away from outdoor activities and opting instead to stay home and stream
Therefore, Mahaney is convinced and remains with the bulls. “Our view is unchanged. User/Subscriber metrics are strengthening (thanks to product improvements & Podcasting), Gross Margin remains stable/stagnant, and Op Losses are growing because of Podcast investments. We view these investments as wise and see accelerating MAU/Sub metrics as leading indicators,” the top analyst said.
Unsurprisingly, Mahaney reiterates an Outperform rating on Spotify whilst staying with his $195 price target. Investors will be pocketing gains to the tune of 66, should the figure be attained in the coming year.
Overall, the bulls currently have the edge; 11 Buys, in addition to 3 Holds and 3 Sells, coalesce into a Moderate Buy consensus rating. It doesn’t hurt that its $164.81 average price target puts the potential twelve-month rise at 40%. (See Spotify stock analysis on TipRanks)
There is something everyone can do to combat the coronavirus’ spread: stay home. Along with proper hygiene, healthcare officials are urging people around the world to practice social distancing by staying home as much as possible and avoiding restaurants, bars, cinemas and other crowded places. This public health intervention could slow the virus’ transmission dramatically, which has now infected more people globally than within China for the first time since the outbreak began-
Given the current volatile state of the market, fears related to the economic impact of social distancing have spiked. While it’s true these efforts have left the service industry reeling, a few names stand to benefit. Companies that facilitate remote working or provide at-home entertainment are well positioned as more and more people restrict their movement and physical contact with others.
Taking this into consideration, we used TipRanks’ Stock Screener tool to pinpoint 3 Buy-rated “stay at home” stocks primed for near-term upside, according to Wall Street analysts. Here’s the lowdown.
Netflix (NFLX)
First up on our list is streaming giant Netflix. As people prepare to be stuck at home, the logical conclusion is that the world is going to be doing a lot of binge watching.
This is the position taken by Piper Sandler analyst Michael Olson. “As consumers engage in less leisure travel and out-of-home entertainment, we believe Netflix could benefit from a temporary bump in subscriber additions,” he commented.
After analyzing Netflix search terms on Google to get a sense of subscription levels, Olson believes that the company is poised to see subscribers in the U.S. and Canada as well as international subscribers increase throughout the first two months of the first quarter. Based on the estimates, Q1 subscriber growth in the U.S. and Canada is expected to come in at 3.8% year-over-year and 32.5% internationally, both of which would surpass the consensus estimates.
It should be noted that over the previous seven quarters, the analyst’s search index “has been directionally accurate in all seven quarters for the U.S. and Canada, with an average subscriber growth error of 0.8%... For international, the index has been directionally accurate in six of the past seven quarters, with an average subscriber growth error of 1.7%.”
Some investors have expressed concern that even given the current climate, Netflix still faces hefty competition from other services such as Apple TV+ and Disney+. However, Olson points out “Netflix continues to capture a significant portion of traditional content consumption dollars as that spend migrates to streaming.”
The five-star analyst added, “Our surveys have suggested that the vast majority of Netflix subs who intend to subscribe to either of the major new services that have already launched (Disney+ and Apple TV+) will do so in addition to maintaining their Netflix subscription.”
To this end, Olson kept an Overweight rating on the stock as well as a $400 price target. Should this target be met, a twelve-month gain of 26% could be in the cards. (To watch Olson’s track record, click here)
Looking at the consensus breakdown, 22 Buy ratings, 7 Holds and 3 Sells add up to a Moderate Buy Street consensus. While less aggressive than Olson’s forecast, the $380.73 average price target still leaves room for 16% upside potential. (See Netflix stock analysis on TipRanks)
DocuSign Inc. (DOCU)
Using its e-signature technology, DocuSign has made it possible for businesses to prepare, sign, act on and manage agreements online, doing away with traditional paper-based agreements. With organizations focusing on shifting work out of the office, one analyst sees big things in store for DOCU.
Wedbush’s Daniel Ives argues that this shift makes the company a necessary service for enterprises of all shapes and sizes. “DOCU is what we believe is an essential IT purchase, plays into a ‘remote/stay at home’ theme for employees-digital signature, and management was very insightful around providing its guidance methodology for FY21. In our opinion, in this uncertain environment this is a rock-solid growth name to own for the coming years with a digestible valuation that could still re-rate higher,” he explained.
Additionally, with concerns regarding IT spending and global demand on the rise, Ives cites the company as one of his favorite names and stories in the coming years. In a note to clients, the analyst points to its most recent earnings release as being the source of his optimism. At 40%, billings growth landed 400 basis points ahead of the Street’s call thanks to its expansion of Agreement Cloud and its CLM offerings.
This result prompted Ives to state, “We believe DOCU is seeing an inflection of demand in the field that is just starting to kick into its next gear over the coming year which speaks to its robust guidance which was also well ahead of expectations (despite the shaky panicked near-term environment).”
It makes sense, then, that Ives decided to stay with the bulls. In addition to leaving his Outperform call as is, he also maintained his $90 price target. This conveys the analyst’s confidence in DOCU’s ability to surge 15% over the next twelve months. (To watch Ives’ track record, click here)
All in all, the opinion is split evenly down the middle. With 2 Buys and 2 Holds issued in the last three months, the word on the Street is that DOCU is a Moderate Buy. (See DocuSign price targets and analyst ratings on TipRanks)
Zoom Video Communications (ZM)
Like DocuSign, Zoom Video is enabling organizations to conduct business remotely, offering a video and audio-conferencing platform. Amid the ongoing public health crisis, ZM has been grabbing headlines due to its 58% year-to-date climb. It’s no wonder Wall Street is taking notice.
That being said, J.P. Morgan analyst Sterling Auty reminds investors that even though he thinks revenue will get a boost, expectations should be kept in check. During the fourth quarter, there was an increase in usage as a result of the coronavirus-induced travel and movement restrictions, but this didn’t lead to a material impact on financial results. This is because most of the gains in usage came from the free service rather than paying customers. “Our view is that the virus outbreak provides ZM with an opportunity to showcase how their product ‘simply works’ and is a potential driver for the long-term revenue opportunity in Asia which is still relatively underpenetrated,” he explained.
Auty added, “Ultimately, getting more people to try the solution we believe will lead to even better long-term market penetration. On the margin front, we have never witnessed this level of continued operating leverage expansion and that is driving significant upside in cash flow.”
On top of this, Auty sees several important takeaways from the company’s most recent quarter. Surpassing the five-star analyst’s prediction, ZM was able to add 7,800 net customers with at least 11 employees for the third quarter in a row. The company also impressed in terms of both its operating margins and free cash flow. If that wasn’t enough, Zoom phone delivered a strong performance one year after its launch, with Auty noting that the service could fuel even more upside.
Bearing this in mind, Auty remains optimistic about ZM’s long-term growth prospects, and thus maintained an Overweight rating. Along with the call, he bumped up the price target from $125 to $150, suggesting 33% upside potential. (To watch Auty’s track record, click here)
In general, Wall Street takes more of a cautious approach when it comes to ZM. Its Moderate Buy consensus rating breaks down into 5 Buys, 10 Holds and 1 Sell doled out in recent weeks. (See Zoom Video stock analysis on TipRanks)
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