It doesn’t take a MBA from Columbia Business School to figure out that “work-from-home,” stocks were going to underperform in 2021.
Zoom Video (NASDAQ: ZM), Wayfair (NYSE: W), Chewy (NASDAQ: CHWY), Roku (NASDAQ: ROKU) and Carvana (NASDAQ: CVNA) were all big winners in 2020.
Currently Zoom, Chewy and Roku are down 30%+, Wayfair is down over 15% and Carvana is flat for the year.
Don’t make me mention Peloton (NASDAQ: PTON)…
Let’s assess the past, and future, of “WFH” stocks.
Even with the recent surge of the Delta variant, as well as the new Omicron, these former Wall Street darlings are not looking so hot. What should investors do, particularly ones that hold these stocks in their portfolio?
Prior to the pandemic, Zoom Video Communications was a fast growing video-communications platform, allowing multiple people to participated in video conferences at the same time.
From an investor’s standpoint, the company was trading at 40x TTM sales with a valuation of $20 billion. You could say that Zoom was rather “richly” valued in 2019. The company wasn’t very profitable, (2% operating margin for the full year 2019), but were at least profitable (shocker) and had a 100%+ sales growth, annually, since going public in 2017.
Fast-forward a year later, they are now the face of video communication. If a $20 billion valuation was “rich,” what do you call a $120 billion valuation?
Funny enough, 2021 was a great year for Zoom. Operating margins jumped as high as 30% and the company is slated to record over a billion dollars of operating profit this year. But the stock, nonetheless, is trading at 15x TTM sales. Why?
Because there are no more lockdowns.
Zoom, like many of the WFH stocks, were given higher valuations because of the uncertainty of the pandemic. The longer the uncertainty, the higher the valuation.
The innovation of the covid-vaccine was the catalyst that ended the party, with WFH companies no longer expected to produce blowout growth. And that isn’t accounting for the coming Fed rate hikes, which will lower valuations further.
Oh, and, maybe having the CEO selling over a billion dollars worth of stock, over the last two years, wasn’t helping with investor’s confidence.
Even with the recent influx of cases, the market is no longer pricing in the potential of lockdowns, which hurts the companies long-term performance.
If you bought Zoom, Chewy, Carvana, or any WFH stocks, prior to the pandemic, you are still a winner. These companies are all disruptors in one way or another (even Zoom, technically) and should produce value in the long-run.
Automobile, furniture, and even pet supplies, are likely going to continue transitioning towards an online business model, where Carvana, Wayfair and Chewy will hold a major part of their respective market share.
Nonetheless, no investor wants to dump capital into a business valued more richly than the sure-fire Google (NASDAQ: GOOG) or Amazon (NASDAQ: AMZN), without guaranteed future returns.
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