What happened
Shares of video collaboration platform provider Zoom Video (ZM +1.55%), smart fitness product specialist Peloton Interactive (PTON +1.49%), and edge computing company Fastly (FSLY 1.41%) were all hit hard on Wednesday. As of 11:45 a.m. EST, the stocks were down about 4.4%, 6.9%, and 6.8%, respectively.
A broader sell-off of growth stocks on Wednesday was likely the primary reason for the sharp declines in those three equities.
Image source: Getty Images.
So what
Partially capturing the bearish sentiment toward many tech and growth stocks on Wednesday was the tech-weighted Nasdaq Composite's 0.26% decline at the time of this writing. That index is more heavily tilted toward growth stocks than the S&P 500, which is why the general decline among them left it underperforming compared to the S&P 500's 0.6% gain.
Of course, even though the Nasdaq was down 0.26% at the time of this writing, many growth stocks fell even more. It's not surprising, therefore, that Zoom, Peloton, and Fastly were down so sharply.
Growth stocks have been taking a beating recently, and most are now trading significantly below the levels they hit in mid-February. Many investors seem to be doing some profit-taking after the COVID-19 pandemic drove huge demand for shares of fast-growing tech companies last year. Indeed, companies like Zoom, Peloton, and Fastly were all viewed as major beneficiaries of the social-distancing and work-from-home trends that manifested as people all around the world sharply reduced their in-person contacts to help curb the spread of the coronavirus.
All three of these companies saw accelerated growth last year compared to 2019. Zoom's trailing-12-month revenue soared 326% year over year to $2.65 billion; Peloton and Fastly's trailing-12-month revenue increased 139% and 45% year over year, respectively. These companies' resilience and their ability to capitalize on fast-growing markets attracted investors in droves, driving Zoom, Peloton, and Fastly's share prices up about 400%, 430%, and 340%, respectively, in 2020.
With such big run-ups behind them, it's not surprising to see an extended period of profit-taking. Since mid-February, shares of Zoom, Peloton, and Fastly have fallen by 25%, 33%, and 36%, respectively.
Now what
Investors should think carefully before they follow the herd and aggressively hit the sell button.
All three of these companies expect more strong growth this year, albeit at slower paces than in 2020. Further, Zoom and Peloton specifically have become extremely profitable. The two companies generated $1.4 billion and $548 million of tailing-12-month free cash flow, respectively.
Instead of buying and selling based on short-term stock price trends, investors may want to take a closer look at these companies' underlying financials to see if this pullback may represent an attractive buying opportunity.
