The COVID-19 pandemic has wrought a lot of havoc on many businesses all over the world, including travel, entertainment, or any business that requires people gathering together. However, the pandemic has been an absolute boon to companies that serve people from their homes across e-commerce, cloud technology, and streaming services.
The latter stocks have by and large done very well this year. While things may change if a vaccine arrives, that may not be for a few quarters, or even years. It's also an open question whether the stay-at-home trends may stick around even when the pandemic is over. As such, investors should monitor these following high-flying stay-at-home leaders that may have changed the game for good.
Zoom Video Communications: 335% growth
Perhaps no company is more the poster child for the COVID-19 economy than Zoom Video Communications (ZM -4.03%). Based on these torrid growth rates, it appears the video conferencing tool is winning the battle for remote communications against some very big, well-funded competitors. Zoom's success can be attributed to its extremely easy-to-use application that "just works" and doesn't require an app download for people to use.
Last quarter, Zoom reported nearly unheard-of growth for a somewhat large company. Revenue grew a stunning 335% to $663.5 million. Even better for shareholders, net income surged from $5.5 million a year ago to $183 million, making Zoom the rare high-growth software-as-a-service company that's also profitable. Cash flow growth was even better, increasing from $31.2 million to $401.3 million. Net expansion rates among customers with more than 10 employees exceeded 130%, meaning existing customers are increasing their spend with Zoom, and the number of customers that contribute more than $100,000 per year increased 112%.
Management forecasts revenue between $2.37 billion and $2.39 billion for the current fiscal year, along with adjusted (non-GAAP) EPS of $2.40 to $2.47. Investors should be aware that at its current share price of $383 per share, Zoom trades for about 157 times those estimates, so the market is already factoring in even more continued good times for Zoom years into the future. Still, there's no denying the crazy-good results for this market darling thus far.
Peloton: 172% growth
Shares of Peloton (PTON 13.00%) have tripled in 2020, as the exercise-at-home stock has seen its growth skyrocket while people avoid gyms during the pandemic.
Last quarter, revenue surged a whopping 172%, as exercisers discovered Peloton's leading fitness-at-home products and workout subscriptions. Connected fitness product revenue, which includes the main Peloton bike products as well as apparel, surged 199%, and subscription revenue grew 98.7%. However, the end-of-quarter subscription count was higher than that at 210% over the year-ago quarter, as subscriptions grew throughout Q2.
Margins also improved across the board, and Peloton became profitable during the quarter, logging $89.1 million in net income, even though for the year ended June 30, Peloton recorded a net loss of $71.6 million. That being said, Peloton generated $220 million in free cash flow over the past 12 months, as upfront annual customer subscriptions boosted deferred revenue by $279 million.
The tripling of both subscribers and equipment sales is really something to behold, and speaks to Peloton's current leadership in at-home fitness. The company also hopes to keep equipment sales going, with introduction of Tread+, a new treadmill product, as well as the new deluxe Bike+. The company also lowered the price of its standard bike with the introduction of Bike+.
One thing for investors to watch out for is that equipment sales still account for 80% of the company's current revenue, which could be somewhat of a danger once all customers have bikes and treadmills. There's also the open question as to whether, as with Zoom, a lot of Peloton's growth has been pulled forward into this year. For what it's worth, Peloton's management has guided to 90% growth for the upcoming 2021 fiscal year, so the company appears to believe its growth still has a long way to pedal.
Etsy: 137% growth
Finally, specialty e-commerce retailer Etsy (ETSY 0.79%) grew sales 137% in the June quarter, as many people discovered the handmade craft retailer amid COVID-19 quarantines. Also boosting Etsy's growth was its high proportion of custom-made face masks on its platform, which actually accounted for 14% of its sales.
Total gross merchandise volume and marketplace revenue grew 145.6%, while services revenue, which primarily consists of seller advertising and resales of shipping labels, grew a respectable 110.7%. Net income accelerated by an even greater 429.1%, from $18.2 million to $96.4 million.
Just about everything went right for Etsy last quarter, with active sellers increasing 34.6% over the prior year to 3.14 million and active buyers up 41% to 60.8 million. During the quarter specifically, Etsy attracted 11.5 million new customers, along with 7.2 million "relapsed" customers that hadn't purchased from Etsy in over a year.
One danger for Etsy investors, as was the case with Zoom and Peloton, is whether its ultimate growth was pulled forward into this year. That's not a certainty, as Etsy said that even non-mask sales grew at a healthy 93% clip, and 86% of sales on the marketplace was non-mask sales.
Therefore, while Etsy did most certainly get a face mask "bump," it's also possible that the influx of new customers will stick around and make Etsy more of a habit going forward than its was in the past. Etsy is also the "cheapest" of the three stocks mentioned here, with a forward price-to-earnings ratio of 58, by virtue of its higher proftiability heading into the year.
Time to jump in? It depends
The decision to buy or sell these high-flying growth stocks really comes down to whether you think these consumer darlings will sustain high growth going into the future, or whether customers may leave once the pandemic is over. Remember, the value of a stock is the present value of all future cash flows, not just the growth in a single year.
That being said, there is also a case to be made that the pandemic has permanently, or at least semi-permanently, changed consumer behavior, making these platforms more entrenched in our lives than they were pre-pandemic. Many of you reading this are likely a user of Zoom, Peloton, and/or Etsy, so if you think you will continue to use their services more frequently than you did pre-pandemic, even when a vaccine arrives, then they may still be attractive buys, especially if the current technology sell-off continues. As with everything in investing, time will tell.