The market has been unkind this year to some of the hottest growth stocks of 2020. As interest rates have risen and some companies have seen growth rates slow, stocks have slipped -- in some cases by very large amounts.
Three such stocks are Teledoc Health (TDOC 5.57%), Peloton Interactive (PTON 3.44%), and Zillow Group (ZG 1.85%) (Z 1.94%). All three have seen their stock prices fall by about 50% since their peaks earlier this year. But these aren't flawed companies long-term, and I still like these investments -- which makes me think these three stocks are ready to bounce back.
1. Teladoc: Driving virtual healthcare into the mainstream
Virtual healthcare is a growing trend that I don't see stopping anytime soon. But Teladoc has hit some bumps along the way. After acquiring Livongo last year, the company quickly became a market favorite in the healthcare industry, especially as the pandemic ravaged the world. Today, the pandemic's impact on healthcare is subsiding and Teladoc's growth is slowing, but that doesn't mean this is a weaker company long-term.
In the second quarter, Teladoc's revenue grew 109% versus a year earlier to $503 million, and management said it expects $2.0 billion to $2.025 billion in revenue for the year. Now, it's clear that growth is slowing given third-quarter revenue guidance of just $510 million to $520 million, and Teladoc isn't yet profitable, so it's understandable that growth investors are questioning the stock. But I think we need to focus on the long-term transition taking place in healthcare.
The pandemic has proven that healthcare can use virtual tools, and I think the use cases will grow. As a parent of young children, the biggest shift in the last two years is that virtual visits have gone from being completely unavailable to being a standard procedure when our child gets sick. And this change happened quickly with little notice. Imagine how much impact there will be on how we view virtual healthcare as it becomes the norm and users and doctors learn to collect and share data from smartwatches and other digital wearable devices. I'm very bullish on virtual healthcare long-term, and Teladoc is a leader in the space, which is why I think this stock will bounce back eventually.
2. Peloton: Breaking a sweat
Another company that had slowing growth in 2021 was Peloton. This was one of the hottest stocks in 2020 as work from home became popular and people looked for ways to workout at home. But as people go back to work and gyms open up, it's natural to see Peloton's growth slow.
In the fourth quarter of fiscal 2021, total revenue was $936.9 million, down from $1.26 billion one quarter earlier. That sounds like a bad result, but it was due to fewer hardware sales -- the number of subscriptions Peloton had actually increased from 2.08 million to 2.33 million between the third and fourth quarters of the year. Bike and Tread sales will ebb and flow, but if the subscriber base is growing the business will do well.
We are also seeing a rapid diversification of Peloton's fitness business. In fiscal 2018, nearly 90% of workouts were cycling workouts. Last year less than 60% were cycling, with strength, floor, and meditation/yoga all growing rapidly.
Peloton remains a top name brand in home fitness, and it's growing both its content presence and its subscriber base, which is good news for the stock long-term. Shares are still trading at a lofty price-to-sales ratio of 6.8, even after the recent drop in the stock, but long-term this is a company I'm betting on disrupting the home fitness market even further.
3. Zillow: The future of real estate
Few industries are ripe for disruption like real estate. Brokers have long controlled information in real estate transactions, and that has allowed them to charge high fees to sell homes. But Zillow is disrupting that model with both its app that connects buyers and sellers and the Zillow Offers business, where Zillow itself buys and sells homes.
Over the last few months, the market hasn't quite known what to do with Zillow's business. Internet, Media & Technology (IMT) segment revenue jumped a whopping 70% in the second quarter of 2021 to $476 million, and segment income before tax was $134 million. This is the core app and advertising business, and it's booming as the housing market goes bonkers.
The Homes side of the business, which includes Zillow Offers, is a little more up and down. Revenue was $777 million as the company sold 2,086 homes, but the loss before taxes was $59 million. On Monday, the company announced it was pausing further home buying because it has too much demand and not enough staff to keep up. Buying and selling homes could be a high-growth, disruptive business long-term, but it will take time to build out and we saw this week that it isn't without risk.
Investors may not be as bullish on Zillow as they were earlier this year, but the company is still growing quickly and it could be extremely disruptive in real estate over the next decade. That's why I think shares will bounce back, even if it takes time.
What it takes to bounce back
For Teladoc, Peloton, and Zillow, the key to bouncing back will be continuing to perform well. If revenue grows and profitability improves, in time the stock will bounce back. Those are the factors investors should keep their eyes on, because in each case I think there's a lot to like about these stocks long-term.