Some of the top-performing equities during the past year and a half have been so-called “pandemic stocks” – companies whose businesses benefited from the restrictions imposed due to the spread of COVID-19. But while these companies’ shares have soared, the big question is how they will fare now that restrictions are being lifted and economies are reopening.
While the biggest gains for these companies – examples include digital fitness provider Peloton Interactive Inc. PTON-Q, online video and web conferencing provider Zoom Video Communications Inc. ZM-Q, and e-commerce platform provider Shopify Inc. SHOP-T – have likely already taken place, many observers see the companies as attractive choices for most investor portfolios, but with some important caveats.
“These companies clearly benefited from the pandemic, but their businesses were good before that, too,” says Ed Yardeni, a longtime Wall Street strategist and president of Yardeni Research Inc. in New York. “The results of some pandemic plays may slow post-pandemic – but they tend to be growth stocks, with in-demand goods and services, so they should continue to do well.”
Nevertheless, he notes that pandemic stocks may be laggards for a while as markets rotate to other sectors – but he sees them as underperformers at worst, and not likely to actually lose value.
Zoom Communications became a focal point during the pandemic, as many people used its online video conferencing several times a day while they worked from home. The company’s shares soared as a reflection of the suddenly crucial value of its products. But now investors are wondering how relevant Zoom will be in the post-pandemic world.
“It will be a vital part of the hybrid workplace,” says Rishi Jaluria, managing director, software equity research, at RBC Capital Markets in San Francisco.
The “hybrid workplace” will be a mix of at-home and in-office work, and he says this work setup is more challenging than with either all in-person or all-remote participation. As such, he believes Zoom Communications has the best tools for solving this challenge.
While there is a risk from heightened competition from the likes of Microsoft Corp. MSFT-Q and its Microsoft Teams platform, Mr. Jaluria says there’s enough product differentiation and room in the space for more than one operator. He recently named Zoom Communications as his top pick, and an attractive buying opportunity considering the stock’s recent pullback from its highs.
Some analysts are more cautious about Zoom Communications as an investment at this time. Dan Romanoff, equity research analyst at Morningstar Inc. in Chicago, says he is a believer in Zoom as an essential tool, adding that the company has been diversifying its product offerings and retaining its customer base post-pandemic. However, he has issues with the company’s valuation.
“In order to support the current share price, investors would have to believe revenue would be more than US$60-billion annually in 20 years,” he says.
As a point of reference, Zoom Communications produced revenue of about US$2.65-billion in fiscal 2021, ended Jan. 30, up 326 per cent from US$623-million in fiscal 2020.
Mr. Romanoff adds that Zoom Communications will have to invest more in research and development, and he believes its profit margins are unsustainably high.
Digital fitness provider Peloton was another star performer during the pandemic, as individuals shifted their workouts to their homes and embraced the company’s system of online and interactive classes. However, the company did have a setback early this year when its new treadmill was found to have serious safety flaws.
Much like Mr. Romanoff’s concerns about Zoom Communications, Simeon Seigel, managing director, senior retail and e-commerce analyst at BMO Capital Markets in New York, is skeptical about Peloton’s valuation.
He says the company’s current lofty stock price suggests a “divergence from fundamentals.” Namely, Mr. Simeon says Peloton’s valuation is pricing in a lifetime of profits for almost 18-million customers – and that they stay subscribed for about 26 years.
Yet, there has been a marked slowdown in the pace of new customers Peloton has been adding and company insiders have recently sold off more than US$500-million in stocks – all contributing to an “underperform” rating on Peloton’s stock.
Meanwhile, Shopify was Canada’s poster child for the pandemic stock phenomenon. Demand for its e-commerce products pushed up the company’s market capitalization, making it the most highly valued company in the country. But unlike with Zoom and Peloton, most analysts consider Shopify’s current stock price as more justified by fundamentals.
“Shopify has been one of our favourite names for a number of years – and it continues to be so,” says Richard Tse, managing director and technology analyst at National Bank Financial Markets in Toronto.
He sees “a lot of untapped opportunities” for the company – particularly in areas such as order fulfillment and financial services, which he considers multi-billion-dollar markets.
Mr. Tse says that following his analysis of Shopify’s latest quarterly results, he was impressed with the company’s performance considering it covered a typically slower period of the year and Shopify management had given a relatively cautious outlook for the quarter.
Mr. Tse highlighted the performance of Shopify’s merchant services unit, which includes areas such as payment management and shipping services, in a recent research report. He also cited positive trends in international expansion and new products such as Shopify Plus, which helps speed up customers’ e-commerce operations.
National Bank Financial Markets is maintaining its “outperform” rating on Shopify shares.