The COVID-19 pandemic has accelerated trends and created new ones. While many companies are struggling, others are seeing booming demand. Zoom Video Communications (ZM +1.55%), Peloton Interactive (PTON +1.39%), and DoorDash (DASH +2.54%) have experienced epic growth this year, and all three stocks are priced like the party will go on forever.
The party will not go on forever. Here's why these three COVID stocks could crash and burn in 2021.
Image source: Getty Images.
Zoom Video Communications
Zoom provides a simple way for individuals and businesses to make video calls and hold video meetings. A pandemic that forces workers out of the office and prevents people from spending time face-to-face is the best environment Zoom could possibly hope for. Zoom's revenue soared 367% in the third quarter, and the company expects to bring in around $2.58 billion of revenue for the full year.
What happens after the pandemic is over? Certainly, the shift to remote work won't be completely undone. Some companies may opt to remain remote, while others may shift into more of a hybrid situation. Zoom calls and meetings aren't going away.
What will change is that companies will no longer have no choice but to adopt video conferencing software. The Zoom investment thesis right now seems to hinge on the expectation that people and companies will largely do the same thing later, when they have choices, as they're doing now, when they have none.
Zoom is valued at about $110 billion. The stock goes for over 40 times forward sales. That valuation requires that Zoom continues to grow at an impressive pace after the pandemic has fully passed. It completely ignores the possibility that Zoom's growth could slow way down, or even potentially turn negative, as those only using the service because they absolutely have to jump ship.
Zoom's growth story won't necessarily die with the pandemic, but it may not be anywhere close to good enough to justify the stock's sky-high valuation.
Peloton Interactive
Sellers of home exercise equipment have been big winners as the pandemic forced gyms to either close or operate with severe restrictions. Peloton, the company that has successfully convinced people to shell out close to $2,000 for a stationary bike on top of a $39 monthly subscription, has been on fire.
Peloton saw its revenue soar 232% in its latest quarter as consumers snapped up its expensive equipment. This is a company with the right product at the right time. In the context of restricted gyms and an aversion to spending time indoors with other people, dropping two grand on a stationary bike with a screen attached doesn't sound so crazy.
But again, what happens after the pandemic is over? Surely, some people will find that they prefer working out at home. Those people won't be restarting gym memberships or paying for classes. But going to the gym and attending workout classes are not just about staying in shape. There's a status symbol component.
My guess is that there will be intense pent-up demand for in-person fitness classes after the pandemic is over. Another guess: At least some people buying Peloton's can't really afford them. Peloton offers financing through Affirm, and that company recently disclosed that 30% of its revenue comes from Peloton. A potential flood of used Peloton's on the market after the pandemic is over could dampen demand for new products.
Peloton is valued at around $36 billion, or about 15 times annual sales. That's a valuation more fitting for a software company than an exercise equipment company. Yes, Peloton sells subscriptions, but subscription growth is driven by equipment growth. It's almost a guarantee that Peloton's growth is going to slow way down after people have out-of-the-home fitness options again.
The fitness industry has long been prone to fads. Peloton may be one of them, albeit one supercharged by the pandemic.
DoorDash
You would think that the leading third-party delivery company in the U.S. would be able to turn a profit during a pandemic that has at times shut down or restricted dining at restaurants. You would be wrong.
After going public last week, DoorDash is valued at roughly $50 billion. The company claims a 50% U.S. market share, generated $1.9 billion of revenue during the first nine months of the year, and posted a loss of $149 million for the same period.
The pandemic is the best possible environment for DoorDash and it still can't make money. It will be even harder to turn a profit once the pandemic ends: Uber is betting big on restaurant delivery for some reason, and people will likely be less willing to pay the service fees, delivery fees, and tips associated with third-party restaurant delivery when eating at a restaurant is no longer a health risk.
I can't tell you how many times I've opened the DoorDash app and started an order, only to abandon the effort once I saw that the cost of the meal had essentially doubled after all the fees. And that's during a pandemic!
If there's any pandemic darling that falls apart next year when reality finally returns to the stock market, DoorDash is it.
