What happened
Shares of stay-at-home stocks, including Zoom Video Communications (ZM +0.78%), Peloton Interactive (PTON +0.44%), and Teladoc Health (TDOC +4.17%), were pulling back after the new $900 billion coronavirus relief package went into effect last night, with President Trump signing the bill after several days of delays.
The deal includes direct payments of $600 to Americans; enhanced unemployment benefits; aid for small businesses; funds directed to transportation, education, food stamps, and rent assistance; as well as money for vaccine distribution.
Stay-at-home stocks like the trio above have generally benefited from news showing the pandemic is getting worse or longer, and they have fallen on news portending its end. For example, all three of these stocks, which include the leaders in videoconferencing software, connected fitness, and telehealth, dived when Pfizer and BioNTech reported successful phase 3 vaccine trials on Nov. 9.
The passage of the new relief bill doesn't have the same direct impact on this group of stocks, but it will help give aid to struggling competitors and makes "recovery stocks" more appealing, giving investors cause to rotate out of stay-at-home stocks. Shares of Zoom, Peloton, and Teladoc are all up by several times their price at the beginning of the year, and many investors believe they are overvalued, especially as it now seems likely that the economy will normalize in 2021 as the pandemic fades.
Zoom stock closed down 6.3% on Monday, while Peloton lost 6.5%, and Teladoc gave up 4.9%. At the same time, the S&P 500 was up 1%, showing that most stocks responded favorably to the relief bill's passage.
Image source: Getty Images.
So what
Zoom has been arguably the biggest stay-at-home winner this year. The stock is up more than 400% year to date, and the company has gone from being a niche business product to a universal and necessary utility that companies, schools, families, and friends rely on to work, learn, and stay in touch with one another.
Along the way, Zoom's business has skyrocketed as revenue has jumped more than 300% over the last two quarters, and it's delivered gobs of free cash flow. But its market value has now topped $100 billion, and there are legitimate questions about what the company's growth will look like when the pandemic is over. The coronavirus relief bill should help office buildings and the transit systems they rely on recover from the pandemic faster once the crisis over. In the case of Zoom, those fears and a belief that the stock is overvalued have caused shares to drop 40% since their peak at $588.84 on Oct. 19.
Unlike Zoom, Peloton shares touched an all-time high last week after the interactive fitness company said it would acquire Precor for $420 million, giving Peloton greater exposure to the commercial market, which includes hotels, college campuses, and apartment buildings. The deal seemed to be a sign that Peloton, which has seen its manufacturing capacity overwhelmed during the pandemic, expects robust growth to continue even after the crisis fades.
It's unclear what will happen after the pandemic, but Peloton's triple-digit revenue growth in recent quarters is likely to slow down. The relief bill should also help gyms and businesses like yoga studios bounce back from the crisis.
Lastly, Teladoc shares have cooled off since a rally earlier in the year. Investors were turned off in August by the company's decision to acquire diabetes-monitoring specialist Livongo Health, perhaps thinking Teladoc had overpaid for it. And more recently, reports that Amazon was preparing to enter telehealth also caused Teladoc shares to fall.
The shares have more than doubled this year, but have essentially traded flat since July, and at this point, investors may need to see evidence that the company can deliver strong growth post-pandemic for the stock to move higher. Like Zoom and Peloton, Teladoc's revenue more than doubled in its most recent quarter, but valuation concerns seem to be at the forefront for investors as the economy shifts into recovery.
Now what
Zoom, Peloton, and Teladoc were far from the only stay-at-home stocks to slide today as other popular plays like DocuSign, Shopify, and Fastly all pulled back as well.
Growth stock investors, especially in stocks that have benefited from the pandemic, should take today's action as a sign of caution. As we move closer to a full-on recovery, investors are likely to take opportunities like this to rotate out of pandemic winners and into stocks that have been hard hit by the crisis, like those in energy, financials, and retail.
