The stay-at-home trade is dead.
With President Joe Biden seeking vaccinations for 70% of American adults by July 4, and the Centers for Disease Control and Prevention declaring this past week that the fully vaccinated can stop wearing masks even indoors in most situations, investors are accelerating their exit from stocks that boomed last year as the pandemic gripped the economy.
The conundrum that investors face is sorting out which companies have been permanently transformed—and which are headed back to wherever they were before the virus arrived on our shores.
It’s a decision-making process that may be more difficult considering how well investors did with stay-at-home stocks during the pandemic. The online marketplace for handcrafted goods Etsy (ticker: ETSY) rallied 450% from the end of 2019 as stores had to shut and consumers snapped up face masks. With gyms closed, the stationary-bike company Peloton Interactive (PTON) jumped nearly 500%. Internet bandwidth demand surged, and the content-delivery network Fastly (FSLY) soared 540%.
And with everyone relying on videoconference calls to connect with work colleagues, friends, and family, shares of Zoom Video Communications (ZM) gained 735%. Hope you took some profits.
Now, evidence of both slowing growth and rapidly changing perceptions is showing up.
Etsy provides a vivid example. The company reported March-quarter revenue of $550.6 million, up 141.5%, thanks to strong mask sales, a new round of stimulus checks, and the continued shutdown of many offline retailers. But Etsy also said that June- quarter revenue growth would slow to 15% to 25% on a year-over-year basis—that would be a nearly 10% drop from the March quarter.
While that forecast was ahead of Wall Street estimates, seeing Etsy state that a slowdown is ahead rattled investors. Its stock fell 15% the day after the earnings report, and has dropped 30% in three months.
All of the stay-at-home stocks face similar risks. The business conditions that existed during the pandemic are fading fast.
Here is a rundown of last year’s major trends and the challenges that 2020’s winners face now:
Videoconferencing: Zoom was the biggest winner in the early days of the stay-at-home boom. Sales grew 169% in the April 2020 quarter, and accelerated every quarter since: 355% in July, 367% in October, and 369% in January. But growth will slow sharply from here. Schools will need Zoom less as students return to class, for instance. The Street sees sales growth sliding to 43% in the January 2022 fiscal year and then below 20% in fiscal 2023.
Can Zoom find ways to stay engaged with the millions of people who joined the platform during the pandemic? Will Zoom hold on to its market-leading position amid increasing competitive pressure, in particular from Microsoft Teams? And what’s the right multiple to pay for Zoom shares? Tough questions all.
Zoom shares have fallen by roughly 50% from their peak, but the stock still trades for 22 times estimated current year sales. Microsoft (MSFT) trades at 11 times—apply that to Zoom and the stock would fall another 50% from here.
Leaving the Nest
After a furious rally during the pandemic, stay-at-home stocks have taken a backseat to an economic rebound.
Note: data through May 12. *Percent change from 12/31/19 to 52-week closing high. **52-week closing high to recent price. ***Since Dec. 8, 2020 IPO
Source: Bloomberg
PC Boom: First-quarter personal-computer sales grew at the fastest rate in 20 years amid an urgent need for more—and more powerful—laptops. As Morgan Stanley analyst Katy Huberty has noted, the average U.S. household has just 1.1 PCs—clearly not enough.
The PC sales spike boosted recent results at Apple (AAPL), HP Inc. (HPQ), and Dell Technologies (DELL), as well as at computer-peripherals providers like Logitech International (LOGI). The chip shortage seems likely to extend the boom: Apple recently said that its June-quarter sales guidance would have been $3 billion to $4 billion higher if it were not supply-constrained on Macs and iPads. HP shares, far cheaper than most other tech stocks, have come down only modestly from their peak. Its printer business should benefit as offices reopen and the company continues to buy back shares aggressively.
For Apple, the Street is nervous that the comps are getting difficult; some analysts think that sales in the September 2022 fiscal year could actually decline. Logitech is projecting flat sales for the March 2022 fiscal year. The experience of the pandemic, meanwhile, could prompt some enterprise customers to refresh their installed base of PCs, replacing desktop models with more versatile laptops. And get ready for a wave of new PCs with built-in 5G wireless. Wi-Fi? Who needs Wi-Fi?
Bargain Hunting: Online shopping accelerated during the pandemic, and some of that seems likely to stick—but not all of it. Amazon.com (AMZN) had 44% growth in the March quarter, and projects 24% to 30% growth in the June quarter. Etsy CEO Josh Silverman expects his company’s second-quarter results to “decelerate along with the rest of e-commerce.”
Shopify (SHOP), a provider of e-commerce software that helped many businesses get online during the pandemic, had 110% growth in the March quarter. Now, it projects that “some consumer spending will probably rotate back to offline retail” from here, and that “the ongoing shift to e-commerce, which accelerated in 2020, will probably resume a more normalized pace of growth.” Shopify shares have sold off 26% from their peak—but the stock still trades at close to 30 times current year sales. For a cheaper play, consider pet-food seller Chewy (CHWY), which trades for a modest three times current year sales.
Dark Clouds: If Barron’s had a nickel for every CEO who talked about “digital transformation,” well, we would have a lot of nickels. The pandemic really did force companies to shift more services to the cloud, and that helped a wide assortment of businesses. Investors bid up companies that provide access controls, such as Okta (OKTA) and Datadog (DDOG), cloud-data stocks like Snowflake (SNOW), the e-signature company DocuSign (DOCU), and network infrastructure providers like Fastly.
But the valuations! Oh my, they got out of hand. In the past few weeks, some analysts have begun reducing price targets to reflect “valuation compression”—a nice way of confessing that they were drinking the Kool-Aid. You could dip a toe into stocks like DocuSign (off 30% from the highs), Okta (off 23%), Datadog (down 35%), or even Snowflake (down 51%). But a safer play is to buy the bigger (and cheaper) public cloud plays: Amazon, Microsoft, and Alphabet (GOOGL).
Wild Cards: Keep in mind that there are other factors that could put a kink in your post-Covid dreams. Peloton shares have come under pressure from a safety recall of its treadmills. Teladoc Health (TDOC), which helped kick-start telemedicine, faces new competition from Amazon and Walmart (WMT); the stock is off 52% from its recent peak.
Netflix (NFLX), down a relatively modest 17% from its recent highs, has seen moderating subscriber growth—the company’s competition is less Disney and HBO than it is bars, beaches, and baseball. Because the good news for investors and everyone else is that an end to the pandemic is now in sight.
Write to Eric J. Savitz at [email protected]
