As the job market becomes more competitive, more employers are moving to hybrid work policies, another reason why these technologies will be in more demand, experts say.scyther5/iStockPhoto / Getty Images
Sign up for the new Globe Advisor weekly newsletter for professional financial advisors on our newsletter sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know.
Stocks that played to the working-from-home theme were the heroes of 2020, but they were crushed last year with the damage continuing up to now.
Zoom Video Communications Inc. ZM-Q, which has become a household name, is down 67 per cent in the past 12 months, while Teladoc Health Inc., TDOC-N, a leader in telehealth services, is off by 75 per cent. Roku Inc. ROKU-Q, which streams movies and TV shows, has shed 71 per cent in the same period.
Analysts say the bad news is that if you own these stocks, it’s too late to sell – and they’re unlikely to regain their highs any time soon. The good news is the best of them will continue to thrive in the year ahead, showing more separation between winners and losers.
“I certainly don’t see Zoom going away anytime soon, or Docusign Inc. DOCU-Q or Peloton Interactive Inc. PTON-Q. It’s just how do you value them?” says Greg Taylor, chief investment officer at Purpose Investments Inc. in Toronto
“In the past two years, they have seen massive growth, but the question now is what level of demand is sustainable? What’s normal? How much of that growth was inflated?” he adds.
Elliot Johnson, chief investment officer at Evolve Funds Group Inc. in Toronto, says the innovations are here to stay, and he views stay-connected and stay-at-home stocks as much the same thing.
“In our view, the workplace has changed permanently as a result of the pandemic,” Mr. Johnson says.
The technology stock selloff is revaluing the companies based on expectations of slowing growth and lower earnings multiples. The new multiples recognize that two pandemic years pulled a lot of business forward and those growth rates cannot be sustained as conditions return to normal.
Mr. Johnson says Zoom is a good example of the repricing. Its current price-to-earnings (PE) ratio of 36 compares with 194 at the height of the second COVID-19 wave.
Mr. Taylor adds that before the pandemic, Zoom “was a US$80 stock, so it’s still up from where it was.”
Zoom’s namesake communications platform has become an essential tool for people, he says. It has a good business model and just has to figure out a way to keep growing.
Mr. Johnson argues the pandemic has proved employees can be as productive, if not more so, while working from home. As the job market becomes more competitive, more employers are moving to hybrid work policies. That’s another reason these technologies will be in more demand.
ETFs to play the space
Mr. Taylor actively co-manages Purpose Global Innovators Fund PINV-T, which focuses on enterprise software, consumer technology, robotics and engineering, and cloud and infrastructure.
Evolve markets several passive innovation funds. Evolve Cloud Computing Index Fund DATA-T holds most of the large cloud data firms. Evolve Innovation Index Fund EDGE-T broadly covers disruptive technology. It was a 2021 Refinitiv Lipper Fund Award winner for best global equity fund over three years.
When it comes to investing in innovation stocks, nobody has been more in the spotlight than ARK Investment Management LLC’s chief executive officer Catherine Wood, one of the hottest fund managers on Wall Street in 2020.
Her firm’s ARK Innovation ETF ARKK-A is down 55 per cent in the past year, even though it’s still a giant with US$11.1-billion in assets under management. The ETF was a star performer in 2020, but fell 23 per cent last year and has fallen another 31 per cent so far this year.
In Canada, ARK actively manages five ETFs as a subadvisor for Emerge Canada Inc. The flagship is marketed as Emerge ARK Global Disruptive Innovation ETF EARK-NE. Its performance has mirrored that of the U.S. fund.
The pandemic played to ARK’s strengths, which included stay-at-home trends such as internet and communications stocks.
In a mid-January webinar, Ms. Wood was unfazed by the retreat and reiterated a conviction that artificial intelligence, electric vehicles, and medical revolutions will change our lives. She said there’s no rolling back the changes and the selloff is overdone.
Her fund’s biggest holdings after Tesla Inc. TSLA-Q are Zoom, Teladoc and Roku. She noted that Zoom’s user base has gone up 10-fold since 2019 to 220 million users. Revenue has risen six-fold. Its product is integrated with Microsoft Teams, which is making the combination a dominant force in remote work.
In addition, she said she believes Teladoc will be the backbone of the health care system. Its revenue is up four-fold since 2019, with expanding margins.
“This the real deal. These changes are permanent. We’re not going back to more expensive, less creative, less productive. We are going to continue moving forward,” she said.
So what should investors do?
“It depends on your time horizon,” Mr. Taylor says. ”I think 2022 is going to be a very volatile year, but if people have faith in the business models there are some great opportunities.”
Mr. Johnson adds that if his thesis is correct, you want to continue to own the names that have remote work tied to them. Zoom and Microsoft Corp. MSFT-Q are good examples.
“This market has been tough in the past 12 months, but valuations are back into a sweet spot,” he says.
Adam Mayers is a contributing editor to the Internet Wealth Builder investment newsletter.
For more from Globe Advisor, visit our homepage.