What happened
Shares of Zoom Video Communications (ZM 3.49%), Zscaler (ZS 3.48%), and Just Eat Takeaway.com (JTKWY 3.70%) finished Tuesday down by 2.4%, 6.7%, and 8.1%, respectively. Zoom and Zscaler were actually down by much more earlier in the trading session before recovering.
This may be a situation where good news for the broader economy means bad news for these particular companies, all of which benefited greatly from the pandemic. But on Tuesday, it appeared that traders' recent concerns about the impact of the omicron coronavirus variant were diminishing, and long-term bond yields and oil prices rose, putting pressure on these "stay at home" growth stocks.
Image source: Getty Images.
So what
None of the aforementioned companies made any specific announcements Tuesday, so their sell-offs likely had more to do with macroeconomic factors. On Tuesday, the 10-year Treasury bond yield and the price of crude oil both rose, indicating that investors may be anticipating both a strengthening economy and a relatively rapid emergence from the sharp omicron surge now impacting the country.
In recent days, former Food and Drug Administration Commissioner Dr. Scott Gottlieb stated publicly via a variety of media outlets that the omicron surge in the hardest-hit parts of the U.S. may reach its peak in a couple of weeks, and that the national peak could possibly occur in February.
Good news on the economy means good news for stocks, right? Well, not for these particular stocks. Obviously, Zoom soared early in the pandemic as people learned how to work, teach, and communicate from home through its easy-to-use platform. Tens of millions of employees suddenly working from home and accessing their companies' systems via the cloud also made organizations more vulnerable to cyberattacks, boosting demand for the services of cybersecurity specialist Zscaler. And obviously, when people are afraid (or unable) to go to restaurants or grocery stores, they'll be more likely to turn to services like Grubhub, which was purchased by Just Eat Takeaway in June 2020. So any reason for optimism about the future course of the pandemic is bad news for these stocks.
Not only that, but the aforementioned companies are also growth stocks that are still trading at high valuations, even after a difficult November and December. Zoom's share price looks more reasonable after it was cut in half over the past year, but it still trades at 48 times earnings -- not exactly a bargain if its growth rate meaningfully decelerates. Zscaler will continue to help enterprises improve their cybersecurity regardless of what social distancing measures they need to take, but it trades at a whopping 55 times sales -- not earnings, sales. Just Eat also isn't profitable today, and probably won't be for a while due to wage pressures and management's continued investment in growth.
So what
For young investors, I still think growth stocks are the place to be over the long term. However, the market could actually be entering a rocky period for high-growth software and internet plays that aren't yet making material net profits.
As the economy continues to reopen and interest rates rise, investors may feel the need to shift more of their assets into lower-valued sectors such as financials and energy, which have lagged the technology sector over much of the past decade -- and especially during the pandemic. It may not be exactly like the dot-com crash of 2000, but the market may well begin to favor non-technology sectors in 2022.
Some investors may wish to hold onto these tech companies through the volatility for the long term, but you'll really have to believe in them strongly, given the valuation pressures and the way that investor sentiment is gravitating elsewhere.
