‘Disrupters’ Like Carvana Are Getting Punished. Their Old-School Rivals Are the Real Winners.
Carvana’s stock has fallen nearly 80% in the past 12 months.
Mark Ralston/AFP/Getty Images
It’s new school versus old school, and the new school doesn’t stand a chance.
No, we’re not talking about the NBA playoffs, where the upstart Memphis Grizzlies have the resurgent Golden State Warriors locked in a battle to move on, or even this summer’s Bonnaroo festival in Tennessee, where Japanese Breakfast will rub shoulders with Robert Plant. No, we’re talking about so-called disrupters, which are seeing their stocks fall apart even as the disrupted manage to limit their losses, or even gain.
The damage to the disrupters—or emerging tech, or growth-at-any-price—stocks is well known by now. Carvana
(ticker: CVNA), for instance, was supposed to disrupt how people buy cars, but its stock has dropped 79% over the past 12 months, while its losses continue to grow. Robinhood Markets
(HOOD) was supposed to change the way people invest—and maybe it did—but its stock has dropped 73% since closing at $38 after its first day of trading on July 29. Teladoc Health
(TDOC), which has set out to replace a visit to the doctor with a video screen, has dropped 75% over the past 12 months. It often feels as if the more disruptive a company was supposed to be, the further its stock has fallen.
Part of the problem is that many companies that were dubbed disrupters were simply beneficiaries of the Covid-19 lockdowns. From Peloton Interactive
(PTON)—down 80% over the past year—to Zoom Video Communications
(ZM)—off 66%—to DocuSign (DOCU)—down 59%—these were innovative companies with products that people were forced to use because of the coronavirus; they were not truly disruptive. “During Covid, a lot of their products were forced upon us because we were working in isolation,” says Andersen Capital Management’s Peter Andersen.
Still, with so many would-be disrupters sitting on massive losses, bargains must abound—except, well, not. In a post on LinkedIn this past week, Bridgewater founder Ray Dalio noted that “emerging tech stocks no longer appear to be in a bubble, but neither do they appear to have substantially swung to the opposite extreme, so it’s not necessarily true that now is a good time to buy them.” Bill Gurley, a general partner at venture capital firm Benchmark went a step further by taking to Twitter and warning that “previous ‘all-time’ highs are completely irrelevant. It’s not ‘cheap’ because it’s down 70%.”
Wall Street is coming around to this notion as it wrestles with how to value former highflying growth stocks. Kirk Materne, who covers software stocks for Evercore ISI, notes that investors pushed the amount they were paying for revenue growth relative to profit margins up two to three times from where they were before Covid hit. With the group down so much, that metric has actually fallen below pre-Covid levels, but investors shouldn’t expect stocks to rebound to where they were. Growth “will always be the ‘true north’ for software investors,” Materne writes. But “demonstrating steady operating leverage could be a more important factor in terms of outperforming over the next one to two years.”
“Operating leverage” is the term used to describe the amount of profit boost a company gets as revenue increases, and the “disrupted” stocks would seem to have it in spades. That’s because they have high fixed costs that get spread out more as sales increase, making them more profitable. It’s one reason so many of the disrupted have held up better than their would-be disrupters. AutoNation (AN), a purported victim of Carvana, has gained 16% over the past 12 months, as analysts expect earnings to grow 25% in 2022. Charles Schwab , one of Robinhood’s targets, has dipped just 2.7% over the same period. HCA Healthcare , which runs hospitals Teladoc will help you avoid, has risen 7%. The S&P 500 has fallen 1.3% over the same period.
For investors, that means looking for growth companies that resemble their old-school competitors. For instance, Wedbush analyst Dan Ives recently warned that work-from-home “poster children such as Netflix
(NFLX), Zoom, DocuSign, etc. will continue to see multiples compress as results soften off pandemic highs.” Instead, he points investors to cybersecurity stocks such as Palo Alto Networks
(PANW), Zscaler
(ZS), Fortinet
(FTNT), and CyberArk Software (CYBR), with all but the latter expected to be profitable in the year ahead. His takeaway: “A key theme overlooked during tech earnings season has been strong cybersecurity demand trend,” he writes.
Even some formerly high flyers may be worth a look. Andersen Capital’s Andersen points to Trade Desk
(TTD), which provides targeted advertising, as a true disrupter that has been punished far more than it deserves. Its stock has fallen 40% this year, but Andersen likes the company for its exposure to advertising on connected TVs, which he suspects will drive the shares going forward. “It was thrown out with all the other babies in the bathwater,” Andersen says.
Still, it may take some time for those names to start working again. Chris Harvey, U.S. equity strategist at Wells Fargo Securities, notes that with the focus still on the Federal Reserve and inflation, high-priced growth stocks probably won’t work until inflation expectations start falling. He recommends watching the 10-year Treasury “break-even—the amount of inflation priced into a 10-year Treasury Inflation Protected Security, or TIPS—for a clue as to when it’s safe to re-engage with those stocks. If they fall to a range of 2.5% to 2.75% percentage points from the current 2.87%, then it might be time for these beaten-up stocks to rally. “If breakevens come down, it suggests the Fed has been able to slow the economy,” Harvey says. “In that environment, growth would come back into favor.”
Enjoy the wait.
Write to Ben Levisohn at [email protected]
