The outsize stock moves -- both up and down -- during the height of the COVID-19 pandemic were memorable to investors. And a few stocks that soared during the pandemic have since crashed, sometimes in spite of their businesses performing relatively well.
Zoom Video Communications (ZM 1.57%) and Shopify (SHOP 1.11%) are two of these "pandemic stocks" that saw stock prices rise and fall spectacularly and are now trading below pre-pandemic prices. Using March 1, 2020, as a reference date, Zoom and Shopify stocks are currently trading down about 18% and 26%, respectively. When you use all-time high prices reached during the pandemic, each stock is trading down at least 80%.
And yet, since that March 2020 date, both companies have grown their operations massively and captured long-term customers. Based on performance, their stock prices should be at least marginally higher, right?
Such logic suggests Zoom Video and Shopify are screaming buys at the moment. But just because a company trading is below its pre-pandemic price while still growing its business doesn't necessarily make its stock a buy. Let's take a look at the reasons why.
The market tends to be forward-looking
Markets usually aren't backward facing; investors buy and sell companies based on what they think the companies will do in the future. This axiom drives differences in stock prices -- if the market only looked backward, it would be easy to value a stock, because you would already know the company's business results.
Before the pandemic, Shopify and Zoom had huge plans laid out for investors to review. Shopify envisioned that every business would need an online presence, and Zoom Video believed it would connect families, friends, and businesses through video calls. They just figured it would take some time for the plans to catch hold. When the pandemic hit, it quickly became clear that plans change and what was likely to occur gradually instead needed to occur quickly. Both companies saw a rush of customers adopting their products and that led to massive revenue growth.
ZM Revenue (Quarterly YoY Growth) data by YCharts
Zoom reported multiple quarters of 300% or greater year-over-year revenue growth, while Shopify sustained greater than 100% growth for nearly a year. Of course, that early outsized growth meant tough comparisons when reporting the next year's results. Growth rates in mid-2021 through now couldn't maintain such outsized levels and fell below historic averages as well.
A lot of long-term growth got pulled forward as use of Zoom's software to communicate became ubiquitous and nearly every business that survived the pandemic now had an online presence to drive sales. The result is that investors aren't as excited about the future and sold off as they went searching for the next big thing. The stocks now look cheap in comparison to their historical averages.
ZM PS Ratio data by YCharts
That's because the market believes each has already experienced the most significant business boom they will likely ever experience. But is the growth story done here?
Both Zoom and Shopify have further avenues for growth
Shopify continues to expand into new markets globally, increasing its logistics capabilities, and promoting its in-store solutions. For Zoom, management highlights growth in Zoom Phone and Contact Center products. Additionally, both Zoom and Shopify are focused on growing their enterprise customer base, as both companies see these accounts as long-term growth opportunities.
When a once-high-flying tech company doesn't grow at the pace Wall Street wants, it often turns to a metric that is as or more appealing to investors than outsized growth: profits. While Zoom is profitable, Shopify isn't. Furthermore, Zoom's profit margin isn't great: It was only 4% year over year for the second quarter of fiscal 2023 (ending July 31). In fiscal 2022's Q2 the profit margin was 29% and in fiscal 2021's Q2 it was 28%.
As for Shopify, last year, it posted an operating profit of $139 million (12% margin) in Q2, but this year's second quarter saw an operating loss of $190 million (15% loss margin). It's these results that help explain why the stock is trading so low: Both companies are growing slower while their profitability is falling.
The bears will point out that, despite the greatest growth catalyst either company will experience, these two companies haven't been able to deliver what shareholders want. Management at both companies (along with the bulls) will point out that the growth story isn't done and that there is a huge growth runway ahead.
Management and the bulls might be right. However, the market overwhelmingly disagrees with this mindset at the moment.
If you believe in the long-term vision of both Zoom and Shopify's management teams, then the stocks may be a steal right here. But, if you think this is as good as it gets for both companies, the losses investors have already experienced aren't going to improve anytime soon.
