Saga of Wall Street’s pandemic darlings ends with tears
Think about something new you started doing two and a half years ago to make life easier during the COVID lockdown and chances are there’s a related story about a stock market victim today.
Add to that investor concerns about rising inflation and an economic slowdown that sent Wall Street into a bear market this year, and you’ll find a bleak picture for the companies that became hugely popular during the pandemic.
Connected stationary bicycle repair shop Peloton Interactive (PTON.O) told employees last week that the fourth round of job cuts this year is an attempt to save the company. The issues spotlight other pandemic hot-shots, such as Zoom Video Communications (ZM.O), Nautilus Inc (NLS.N), DocuSign Inc (DOCU.O), and DoorDash Inc (DASH.N).
Growth investors pushed Peloton shares to a record $171.09 in early 2021. Demand for its bikes was so strong that restless consumers had to wait for long delivery delays. But Peloton shares are now down 95% from their peak, closing at $8.53 on Wednesday. The S&P 500 (.SPX) is down about 25% in comparison from its all-time high in January this year.
Others bought sports equipment from Nautilus during the pandemic and sent the shares up to $31.30 in early 2021. It last traded at $1.65.
Zoom became synonymous with online meetings as many people worked remotely and even used video conferencing for social gatherings. But Zoom’s shares were last at $75.22 versus the peak of $588.84 reached in October 2020.
Other stay-at-home favorites included online retailer Amazon.com (AMZN.O) and food delivery service DoorDash. People also flocked to consumer-friendly brokers like Robinhood Markets (HOOD.O) while sitting at home with no sports to bet on. But after scaling from $85 in August 2021, Robinhood last traded at $10.66.
“These are companies with great ideas to get enough funding. They catch a wave when COVID, their usage explodes,” said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh. But once that growth slows, investors lose interest.
“They’ve used up all the air in their universe and they have nowhere to grow. So while people may still be using the Peloton, not enough people are buying the Peloton,” Forrest said.
Daniel Morgan, portfolio manager at Synovus Trust in Atlanta, Georgia, says Peloton may seem cheap, but he’s wary of it being unprofitable. The price-to-sale multiple has fallen to 0.8, on a lagging 4-quarter, from an average multiple of 6.6 since its September 2019 IPO, Morgan said.
Wall Street expects Peloton to report an adjusted loss per share of $2.07 per share for the fiscal year ended June, compared to a loss of $7.69 in fiscal 2022, according to Refinitiv.
Zoom has made money, and the valuation also looks cheap at 35 times earnings per share versus an average multiple of 135 since its April 2019 debut, Morgan said.
However, he is concerned about the profit decline. Zoom’s adjusted earnings per share are expected to fall 27% for the fiscal year ending January, according to Refinitiv, compared to 2022 growth of 55.5%.
Morgan also pointed to a growth slowdown for DoorDash and retail giant Amazon.com, as they are also hit by rising inflation and economic uncertainty.
“Every company will have to see how their particular business model can run in a normalized environment,” he said.
Carol Schleif, deputy chief investment officer at BMO’s family office in Minneapolis, warned against investing in companies that look cheap and have loyal customers. It’s all about management, balance sheets and expected earnings, she said.
While a possible outcome for pandemic favorites with slowing growth could be a buyout by a larger company, Schleif is wary of taking this gamble
“Buying a stock because you think it will disappear is a risk. I wouldn’t do it with money I didn’t want to lose,” she said.
“It’s not really investing. It’s more opportunistic.