The pandemic has resulted in a number of sectors absolutely taking off recently. Specifically, work-from-home-related stocks have been on the rise. Of course, investors bullish on how the pandemic may drive growth long-term in these sectors are eager to jump in. With valuations of such stocks elevated, worries about post-pandemic work environments has led to worries that these work-from-home plays could turn out to be stocks that could crash.
Of course, if these work-from-home companies can maintain or grow their market share over time, these investments will hold. There’s a lot of data suggesting our habits may be fully formed right now. After all, we’re all creatures of habit.
However, the question many investors are asking right now is: what happens when this all comes to an end? Will the incredible growth these companies have seen come to an abrupt halt?
In this article, I’m going to explore seven stocks that could have significant downside if we see a mass stampede back to the office. The pandemic will end, and we will go back to a “new normal” (or semi-normal) at some point. For bearish investors worried about consumers making a complete 180-degree shift, these are the stocks to keep top of mind:
- Zoom (NASDAQ:ZM)
- Peloton (NASDAQ:PTON)
- Shopify (NYSE:SHOP)
- Slack (NYSE:WORK)
- Teladoc (NYSE:TDOC)
- Electronic Arts (NASDAQ:EA)
- Chewy (NYSE:CHWY)
Stocks That Could Crash: Zoom (ZM)
As far as work-from-home stocks go, Zoom is often the first company that comes to mind.
This video conferencing software company has completely changed the game in terms of how the average consumer connects with loved ones. This technology platform has not only been successful with individuals using its free platform. Zoom’s corporate base has expanded nicely. In fact, through the third quarter of last year, Zoom saw a 136% increase in customers generating more than $100,000 in annual income. Overall revenue was up 367% year-over-year.
This sentiment has played out in Zoom’s recent parabolic stock price move. Even with a big selloff in recent days, ZM stock is still up approximately 200% over the same time last year.
As noted with the company’s results thus far, the growth story appears to be real. However, whether this growth continues is the key question for many investors.
It appears Zoom’s recent earnings results release on March 1 have raised some doubts as to this point. Despite posting blowout earnings that beat expectations by 50%, ZM stock dropped materially from pre-earnings levels. How bad was the drop? From it’s highest point, around 20%.
Investors want to see more in the way of growth from Zoom to justify the company’s $100 billion valuation. Analysts expect to see $4.55 in earnings in 2024, meaning ZM stock is trading around 75-times 2024 earnings at the time of writing. That’s steep.
We’re all itching to get back to the office and have those in-person meetings and coffee chats over the water cooler. Accordingly, if investors don’t see the kind of growth they’re accustomed to with Zoom, this is a stock that could sell off.
Going to the gym seems like a foreign idea to many today. This is perhaps even more true for those who have dabbled in the Peloton experience.
This work from home beneficiary has built quite the customer base. Subscriptions grew 134% year-over-year this past quarter. Accordingly, overall revenue was up 128% and subscription gross margin was more than 60%.
Additionally, Peloton enthusiasts will note that the company’s churn rate is extremely low right now. Peloton reported a monthly churn of only 0.8%, with a 12-month churn of 8%.
However, the question many investors have is: just how sticky is this base if we return to a “new normal?” Will Peloton bikes riddle the secondary market as “spinners” hit the spin class at their local gym again? The virtual experience is great, but many paying customers may want the real thing.
Peloton’s got a great product with a great user experience. That said, it’s not cheap, and I expect competitive offers from gyms to flood the market once pandemic-related restrictions are lifted. This is a stock investors should keep their eye on if the work-from-home trend fades.
The go-to provider of e-commerce solutions for small and medium-sized enterprises (SMEs), Shopify has benefited greatly from the work from home trend. As we’ve all been nestled in our home offices and forced to shop online due to pandemic-related restrictions on retail, Shopify’s SME customers have been working hard to transition their businesses toward e-commerce.
Shopify’s a company that defines itself by its work-from-home culture. In fact, the company announced it was switching its press release service over a request to have its headquarters listed as “Internet, Everywhere” rather than its domicile of Ottawa, Canada. Additionally, Shopify has taken steps to ensure its work-from-home culture becomes permanent. The company terminated leases resulting in over $30 million in impairment charges in an effort to take this vision to the next level.
Company culture aside, the question of whether e-commerce growth will be maintained post-pandemic is a serious question plaguing major e-commerce players. As a direct beneficiary of the e-commerce boom, Shopify’s sky-high valuation could come under pressure if shoppers hit the malls in a big way. If Shopify’s customers don’t see the value in maintaining an e-commerce platform in addition to their traditional brick-and-mortar businesses, downside could be on the horizon for this growth gem.
Slack’s communication platform has become essential to how many businesses operate during the pandemic. Why employees need a messaging service in addition to email or the old-school telephone call has become evident. We’re all looking for connection, and right now, this is one of the best ways to stay in constant communication with coworkers, family, and friends.
However, for many, perhaps the most enticing thing about going back to the office is having those in-person meetings once again. Chats over the water cooler or in the break room might eat away at the need for such a service for smaller businesses. Going back to the office has its perks, and Slack’s value proposition might take a hit with some clients in a post-pandemic environment.
Slack’s impressive year-over-year growth in revenue and new paid customers is evidence of the impact the pandemic has had on this tech company. Slack posted growth rates of 39% and 140%, respectively, in these categories. Additionally, Slack reported an increase of 520,000 connected endpoints in its system last quarter. This was a 240% increase year-over-year. This kind of growth is encouraging for investors. However, whether or not this growth rate is sustainable over the long-term remains to be seen.
Accordingly, slower growth is the big risk with stocks like Slack right now. If Slack’s growth trajectory were to change materially, this perfectly priced stock could be due for a selloff.
The healthcare sector is one that has been absolutely transformed because of the pandemic. Providers are increasingly choosing virtual care options over in-person visits as a way of managing patient care. The fewer touchpoints with doctors, the lower the risk of infection to providers. Additionally, it appears many providers are benefiting from the work-from-home benefits this technology provides. There’s speculation that Teladoc’s platform could fundamentally transform the healthcare sector long-term.
Companies like Teladoc provide end-to-end solutions for healthcare companies. Investing in a home-grown virtual care platform is expensive and time-consuming. Teladoc has filled this void nicely, and has reaped the benefits of the increased need for such solutions.
The company reported year-over-year revenue and visit growth of 98% and 156%, respectively. This sort of growth has impressed investors, many of whom believe these changes are likely to be permanent.
This is where some investors diverge. The question of how virtual care companies will perform in a post-pandemic environment is a pertinent one. Virtual care can’t handle the poking, prodding, and physical aspects of care in the same way as an in-person visit.
Thus, expectations of volume and revenue declines from the peaks we’ve seen of late may be behind the recent dip in this company’s stock price. Currently, Teladoc shares are trading roughly a third below their 52-week high.
Electronic Arts (EA)
Stuck at home and got nothing better to do? Video games have filled that void for many a teenager and adult alike.
EA is one of the premier video game providers in the U.S. The company’s sports game franchises have continued to be a favorite among gamers and investors due to the margins these products provide. The pandemic has certainly had a positive effect on EA, reflected in the company’s most recent annual results.
EA reported a revenue increase of 12%, with impressive gross margins of 75%. The fact that EA’s gross margin has improved on a year-over-year basis by two percentage points is a noteworthy development. This company’s growth is extremely profitable, and the same cannot be said for many of EA’s peers. Additionally, earnings per share growth of 30% (excluding a large one-time net tax benefit) is very bullish for growth investors.
However, the extent to which video game enthusiasts will continue to pick up the controller and make those in-game purchases to the same degree when forced back into the office is a big question for many investors. Going back to the office will undoubtedly result in less screen time, and the potential for slower growth for EA. I’d caution investors on looking at recent backward-looking numbers right now. Rather, projecting out future performance may be more helpful in valuing this stock today.
Adoption rates in the U.S. for household pets have soared during the pandemic. We’re all seeking out whatever companionship we can get right now. This is not surprising.
The fact that Chewy, a leading pet care products provider, has continued to post impressive results is also not surprising. Chewy’s revenue growth rate of 45% and margin expansion across the board are impressive. Chewy’s still operating at a net loss, however the company does appear to be making strides toward moving into the black soon.
Pet adoptions tend to be multi-year commitments, and thus make forecasting growth for this sector a simple math problem. Investors appear to like the math on this stock right now. Indeed, should Chewy turn a profit next year, this stock is one that is positioned well to continue on its parabolic trajectory.
However, concerns about how a large-scale transition away from the home office could impact the pet industry is one investors should keep in mind. In such a scenario, it’s feasible to think adoption rates could plummet as pet owners look for ways to manage their lives away from home. Discretionary spending on high-margin pet items could also take a significant hit.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article.