Coronavirus stay-at-home stocks: where next for Amazon and Netflix?

Amazon and Netflix shares defy the wider market amid coronavirus crisis

The Nasdaq has lost almost 8% since the start of 2020 as countries enter lockdown to stop the spread of coronavirus, but two stocks have managed to book considerable gains this year as they thrive in the current environment. Amazon has rallied over 16% and is now trading at an all-time high, while Netflix shares have gained more than 21%.

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Amazon shines from all angles during coronavirus crisis

Amazon is a diverse business with many arms, and all of them have become more important to consumers as they are forced to remain at home.

Its online marketplace, which it is best known for, is delivering the stuff that people need now that most retail outlets are shut. Its Whole Foods supermarkets remain one of the only types of bricks-and-mortar stores allowed to remain open to serve food, enhanced by its online grocery delivery services. Its digital streaming services, like Prime Video, Amazon Music and audiobook platform Audible, have become ways to keep people entertained at home. Its own products, from smart speakers to tablets, are being used to keep people in touch. And lastly, Amazon Web Services (AWS), the profit-maker of the business, remains a core cloud-computing service that underpins other services that people are relying on whilst they are locked-up at home, such as Netflix and Facebook.

Amazon is demonstrating the importance of having a diversified business. It is impressive that all of its major businesses are adapting so they can thrive in the current environment rather than simply try to survive.

Can Amazon deal with the increase in demand?

Amazon is expected to release results for the first quarter of 2020 in late April and we can expect the company to report a surge in top-line growth. Net sales were already soaring ahead, having increased 21% in the final quarter (Q4) of 2019. In March, Amazon said it was hiring an extra 100,000 staff to deal with the number of orders it was receiving. Those positions have been filled already, with Amazon vacuuming up those that have been sacked or furloughed in recent weeks, and it is now looking to hire another 75,000 staff on a temporary basis. While Whole Foods will likely see any forward buying (caused by stockpiling) unwind like other supermarkets, its online marketplace is unlikely to experience the same thing because it is simply swallowing demand from bricks-and-mortar stores that have had to shut or those with poor online offerings.

Amazon Marketplace has had to adapt quickly and make sacrifices, such as limiting the availability of ‘non-essential items’ in favour of household staples and medical supplies. Plus, its usual free next-day delivery option for Prime subscribers has, understandably, gone out of the window during the crisis as international and national delivery systems struggle to cope with the increase in packages being sent. There have also been concerns about how Amazon’s warehouses can continue to operate safely, especially if demand has increased. Amazon says it has changed over 150 processes in its fulfilment centres, everything from introducing social distancing measures to using disinfectant fog, to keep staff safe and operations going. It is also sourcing its own personal protective equipment (PPE), like masks, and tentatively looking at producing its own coronavirus tests for staff.

Although revenue growth will have accelerated in recent weeks, the company will have to invest considerable sums to adapt to the current environment and it will also see its costs increase. For example, a pay increase for workers in the US, Canada, the UK and other European countries was originally set to cost $350 million but has now been raised to $500 million to account for the additional workers it is hiring. It is also highly likely that its operations will not be as efficient as usual as social distancing and other measures will make every day work difficult.

Ultimately, Amazon will remain one of the most important businesses during this crisis, providing key services including food, entertainment and shopping at a time when consumers have fewer retailers to choose from. The challenge will be upholding its Prime subscription package, keeping staff onside by ensuring its operations can continue safely, and meeting increased demand.

Amazon share price: technical analysis

Amazon stock has rocketed to a new record high, hitting $2240 in mid-April 2020. Of all the firms that might stand to benefit, Amazon is a clear winner. From a technical perspective, it looks like the uptrend is back in action; the price has once again broken above the $2050 high that marked resistance in 2018 and 2019, and has now cleared the $2180 peak from February 2020. Chasing the stock now after a near 40% rally might not be prudent, but it looks like further upside is likely from here, providing scope to buy on weakness.

Netflix provides entertainment in a world of boredom

Netflix is already the number one streaming site and its array of content should appeal to those looking to alleviate themselves from boredom during lockdown, allowing them to binge-watch TV series and movies.

Will Netflix be able to retain its new subscribers after lockdown ends?

Netflix has enjoyed an unrivalled position in the market for years, but things have drastically changed as more competitors enter the market. There are a number of video streaming services available and Netflix’s job is to maintain its leadership and growth.

The newest entrant, Disney, is the biggest threat yet. Disney+ brings the Disney, Marvel, Star Wars, Pixar, and National Geographic brands under one service and the company also owns Hulu. Disney+ is thought to have already secured over 50 million global subscribers. That is still less than one-third of Netflix’s customer base, but it is only going to gain momentum while people remain in lockdown.

Fortunately, people will be more willing to subscribe to multiple streaming services whilst they are in lockdown. People will want to maximise their access to content and willing to spend more on stay-at-home services at a time when they are not spending out of the home. Therefore, Disney, Netflix and Amazon should all attract new customers to their video streaming services over the coming weeks and months.

The challenge will come when lockdown measures begin to be eased and people start to return to normal everyday life. Spending less time at home will mean more people will reconsider their subscriptions and many will be less likely to keep paying for multiple services.

There will be a shake-out if people decide to choose what services to retain and the threat is that many loyal Netflix subscribers, having tasted the new offering from Disney, may choose its new rival.

The economy will remain fragile even once lockdown measures are eased, which will prompt more people to scale back on non-essential services like streaming, or at least slim down to one or possibly two services. The best thing Netflix can do during this time is demonstrate why its offering is superior to Disney, Amazon or any other company considering making an entry into its market.

Right now, Netflix leans more to quantity while Disney is more about quality. Netflix spent a whopping $15 billion on content last year and its library is still by far the largest on the market, providing enough TV and film to last even the longest of lockdowns.

It is thought to be around five times larger than what is on offer on Disney+, although Disney arguably offers greater quality content and titles. A large library like Netflix’s may be appealing now when people have so much time to kill, but they may be more inclined to choose a smaller but better quality service when life returns to normal.

Netflix share price: technical analysis

The coronavirus crisis has proven to be a boon for Netflix, a firm that had been suffering from the widespread introduction of new streaming services to rival its own. But after a sharp drop in February and March, the stock has rallied and crucially has pushed above the $389 zone of resistance of the past two years. Further gains target the 2018 peak at $423.