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During the 2019 Covid pandemic, traditional consumer non-essential services fell dramatically in popularity due to the uncertainty surrounding the virus with consumers turning their focus towards online and at home alternatives. With lockdown occurring across most nations on the globe, governments mandated that all non-essentials remain shut with only online operations being permitted.
From this, there was now a scramble in the tech space to provide everyday services in the home, such as education, fitness and shopping, as consumers were willing to pay a premium in order to maintain their previous quality of life. The two examples that are going to be covered are Peloton, a home exercise and workout media subscription company proposed as an alternative to gyms, and Zoom, a video teleconferencing software used to replace work and school face to face contact.
During the grinding social and economic halt Covid brought, many questioned how life would adapt to the new living at home situation. The biggest issue was that work and school had to go ahead as lost productivity could be devastating for the wider economy in the future, therefore this was done through Zoom. The video conference platform saw a 700% increase in its stock price from its humble beginning just before the pandemic at 69 USD to its peak in October of 2020 at 559 USD. The stock reached an annual revenue in 2020 at 2.6 billion USD coming from its subscription services to businesses and schools for additional conference call features and meeting capacity.
Despite the recent sell off of the stock dipping to 260 USD per share in November, the company boasts strong projected revenues with most of their clients keeping the service as an alternative for stay at home work and for if another lockdown comes. Even though the stock hasn’t met many recent analyst expectations, it is clear that Zoom post pandemic isn’t going anywhere any time soon. The pandemic has proven to big tech companies that working from home is a viable option with productivity and worker satisfaction remaining level, this has changed the way that some jobs are done leading to Zoom firmly cementing its place in the big tech sector as a stock that will sustain itself post pandemic.
Cases like Zoom are a rare one because many tech stocks that entered as a substitute to the issues caused by the pandemic did not have a market to fill when the pandemic ended. Big tech companies like Alphabet and Amazon were taking advantage of the Covid situation but not relying on it, where as stocks like Peloton only did well due to speculation due to the sudden market condition changes.
Peloton was one of the best performing stocks of 2020 with their peak on December 21st reached 162 USD per share, 450% higher than their IPO price of 29 USD per share about a year earlier. Their growth was seen as proof for investors that the pandemic would set a new standard for day to day life, securing the companies future in the coming years. This was further backed up by government sponsored programs and each major countries national bank printing more money into circulation in order to keep the economy afloat, allowing for risker stocks to be backed with the support of the governmental institutions.
Share price performance was based on some solid fundamentals, in the 1st quarter of 2021, they reported 1.2 billion USD of revenue, more than 1 billion USD above the previous 200m in 2019. Everyday investors wanted to spend their stimulus money in high grow high risk plays like Peloton in order to make some money for themselves during this time of economic uncertainty. Sophisticated and institutional investors avoided long term analysis on the stock in exchange for short term gains, many didn’t contemplate the company’s ability to generate alpha in the long run, causing a bullish uptake in technology stocks such as Peloton until news on the pandemic’s timespan was made clear. It is commonly known that stock prices are forward thinking with predicted future value being priced in, it is nearly impossible to price in a pandemic. With the major S&P 500 tech stocks being essential to most modern life, some saw investing in these indexes as a safe bet against any recession, especially as younger generations are moving away from pension funds into more actively invested portfolios.
Luckily, the vaccine came surprisingly quick and with speculation about Covid’s severity being overly cautious, the general populations attitude to the lockdowns turned from a positive few months at home waiting for things to blow over, to an attitude of being fed up with the restrictions, pushing for life to turn back to normal. Within the space of a few months in late 2021 most economies have opened up fully with the situation being monitored carefully.
With the market disruption at the hands of Covid seemingly coming to a close, there was a question regarding what the new normal would look like in a post pandemic world. Would life revert back to pre-pandemic norms or would the world prefer the convenience of operating from home? As restricted eased up, it appeared that consumers were reverting back to attending in person gyms with concerns of the virus being minimal amongst most people. Even though covid beneficiary tech companies, such as Peloton, saw huge growth over the last year, there is a huge amount of uncertainty regarding how sustainable the success will be. With Pelotons recent yearly financial reports released in early November, the company has provided an insight into the bleak outlook for similar tech companies in the post pandemic recovery.
On November 5th, Peloton plummeted over 35% after reporting a disastrous earnings report with a wider-than-expected loss in its fiscal first quarter. As a result, the company revised their revenue projections for 2022 with their outlook being over 800 million below last years numbers. The company also reported a net loss of 370 USD million in the 3 month period ending in September of 2021. It is clear that analysts and market movers are not hopeful on the future of Peloton with many labelling the company as a temporary substitute solution to a non-permanent problem.
The situation will only get worse for Peloton as the pandemic wears off, their business plan heavily relies on their subscription plan where workout machines are sold at almost no profit and users sign up to a monthly plan to access workout regiments. The idea that at mass adoption the company would become insanely profitable from the passive revenue but now with purchases of workout equipment plummeting, its only a matter of time before existing users cancel their subscription services in exchange for gym memberships which offer a wider range of machines at a fraction of a price. This will also worsen with people selling their equipment on the second hand market, reducing demand for the already pricy brand new units which was never accessible for the majority of the working class to become with.
Without substantial change, it is unlikely that Peloton will be able to bring back peak pandemic level growth demanded by investors which is an analogy for most of the growth tech stocks. Well established tech giants like Apple, Amazon and Meta are still projected to show excellent growth in the next quarter but have directly warned investors this will not be the same next year. The common explanation is that the pandemic was a one-off exception of hyper growth with a post recovery period of people temporarily turning away from a reliance on technology. Some of the exceptions are tech companies that are within the travel industry like Airbnb with huge upside recoveries underway with revenues decreasing in the pandemic by over 70% now changing to only 22% with projects showing profitability returning for 2022 as the world prepares to go on holiday for the first time in almost 3 years.
Analysts state that investor focus has transitioned more towards traditional economy sectors like banking, airlines and hotels. Since the beginning of November, investors realised that further lockdowns are unlikely due to vaccination and so major airlines, such as Delta and United, have shot up over 50%. In conclusion, the future of these pandemic stocks is uncertain and the focus on tech companies is overall in decline from their highs during lockdown.
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