Tuesday, April 21, 2020
A handful of companies are seeing a surge in demand because of the coronavirus.
But if a company has a bad business model, or its valuation is already too high, this surge won’t help you make money as an investor.
Countless investors are ignoring this reality.
Don’t be one of them!
Here are 3 companies you should consider selling short — or at the very least, avoiding at all costs.
Bull Trap #1: Zoom Video Communications (ZM)
As businesses, schools, families, and friends clamor to stay connected, the number of daily users for this video conferencing company has swelled from 10 million to more than 200 million.
Investors have responded by bidding up its shares almost 100%.
The thing is, the majority of new users are free users, and they’re never going to start paying. Even worse, these new free users are costing Zoom a bundle in bandwidth costs.
This is a recipe for a much lower stock price. Especially when shares are already so expensive…
You see, the average company in the S&P 500 trades for 2x sales…
But Zoom is currently trading for 61x sales.
Look out below!
Bull Trap #2: Blue Apron Holdings (APRN)
When it’s not possible to go out for dinner at a restaurant, but you’re not much of a cook, subscribing to a meal-kit service like Blue Apron might look like a good option.
So it’s no surprise that Blue Apron CEO Linda Findley Kozlowski noted a "sharp increase in consumer demand" in a recent SEC filing.
Perhaps that explains why investors have bid up Blue Apron shares by 431% since mid-March.
But that’s insanity. Here’s why. Before the coronavirus, Blue Apron was on death’s door. It was plagued by terrible margins and terrifying competition.
But newsflash: these problems don’t just suddenly go away because you got some new customers.
Once the coronavirus is over, I expect shares to resume their path towards zero.
Bull Trap #3: Grubhub (GRUB)
The other option for hungry customers is ordering in.
That’s why there’s been a surge in demand for food-delivery services like Grubhub.
This market leader added more than 20,000 new restaurants to its platform in March, which topped February’s record of 5,000 new additions.
Shares have responded by rallying almost 50% in the last 30 days.
But here, too, surging demand is masking terrible fundamentals.
For one thing, the food-delivery industry operates on a “market-share over profitability” approach.
In other words, food-delivery companies are losing money on every order just to gain market share. That’s why even the rosiest projections call for these companies to be unprofitable for years.
What’s more, there’s zero loyalty to such services. Diners hop between apps so they can order from their favorite restaurants. (I’m guilty as charged here.)
Last but not least, food-delivery apps have no pricing power. Case in point: when they tried to pass through price hikes of 10% to 40% to restaurants, they got sued!
And once again, increased volume doesn’t make Grubhub’s fundamental business flaws disappear.
Even Grubhub management admits it: despite the uptick in demand, the company withdrew guidance for the year, admitting it has no clue how bad it’s going to get once the coronavirus boom subsides.
So, please — don’t ignore reality:
You can use these companies… but don’t invest in them!
Ahead of the tape,
Ahead of the tape,