Omicron, the new COVID-19 variant that was discovered last month, has been weighing down the market as investors evaluate its potential impact. Those fears, along with rising inflation and higher interest rates on the horizon, have created a tough market for growth stocks.
However, two beaten-down growth stocks have quietly stabilized in December: Zoom Video Communications (ZM 0.80%) and Roku (ROKU -2.75%). Both stocks generated big gains last year, but they stumbled this year as the pandemic-related tailwinds for the video conferencing and streaming video markets ebbed.
But investors are now warming back up to Zoom and Roku as hedges against market pressures caused by the omicron variant. Zoom's stock is flat since the beginning of December, while Roku's stock has advanced 10%. Could the new threat make either of these stocks worth buying again?
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Zoom's tough year-over-year comparisons
Zoom had been growing like a weed prior to the pandemic. In fiscal 2020 (which ended in Jan. 2020), its revenue surged 88% as its adjusted net income soared 513%. Zoom expanded by disrupting legacy video conferencing platforms like Cisco's Webex with its lightweight interface, easy-to-use tools, and catchy name.
After the pandemic hit, Zoom's revenue soared 326% in fiscal 2021 as its adjusted net income skyrocketed 883%. Its brand became synonymous with video calls throughout the crisis, and it was widely adopted by schools and businesses as students and workers stayed at home.
However, Zoom's growth decelerated this year as restrictions were relaxed and schools and businesses reopened. During its third-quarter report last month, management predicted its revenue would rise 54% for the full year. However, analysts expect Zoom's revenue to only increase 16% next year as it faces tougher year-over-year comparisons.
The bulls believe Zoom's growth will stabilize over the long term, but the bears expect competitors like Microsoft Teams to gain ground in the post-pandemic market. The bears also believe its recent failed attempt to buy Five9 indicates it needs to widen its moat with some big acquisitions.
If the omicron variant causes new lockdowns, Zoom could easily beat analysts' conservative estimates next year. Its stock is reasonably valued at 40 times forward earnings and 13 times next year's sales, limiting its downside potential at these levels.
Roku's supply chain challenges
Roku, the leading streaming device maker in the U.S. and Canada, was also growing rapidly before the pandemic hit.
Its revenue rose 52% in 2019 as it sold more players and expanded its software platform, but its net loss widened. In 2020, Roku's revenue increased another 58% as it narrowed its net loss.
Roku's net losses narrowed as it expanded its higher-margin software platform to offset the lower margins of its player segment. Earlier this year, it acquired more than 75 original shows from the short-lived streaming video platform Quibi to beef up the Roku Channel, a free ad-supported streaming video service that tethers more users to its software platform.
But this year, Roku faced three major challenges: People watched fewer streaming videos as global economies started reopening and recovering, supply chain challenges crushed the gross margins of its player segment, and it clashed with Alphabet's Google over the future of YouTube on Roku devices. Roku resolved its conflict with YouTube earlier this month, but the other two headwinds remain.
Analysts expect Roku's revenue to rise 57% this year, with a full-year profit. Next year, they expect its revenue and earnings to grow 36% and 6%, respectively. That slowdown isn't as dramatic as Zoom's, since the secular growth of the streaming video market should continue long after the pandemic ends. Its future growth is also more dependent on the resolution of its supply chain issues than any pandemic-related lockdown measures.
Roku's growth might accelerate if omicron keeps spreading rapidly, but it won't experience as much of a near-term boost as Zoom will. Roku's stock might look a bit pricey at 122 times forward earnings since its profits are still slim, but it isn't that expensive relative to its top-line growth at eight times next year's sales.
The safer investment: Roku
Zoom and Roku will both likely attract more investors if the pandemic drags on. However, Roku is a better overall investment for four simple reasons: It's better diversified, it's cheaper relative to its sales, its slowdown is less severe, and it isn't as dependent on omicron-related lockdowns for its near-term growth.
