The saga of Wall Street's pandemic darlings ends in tears

The saga of Wall Street’s pandemic darlings ends in tears

Oct 12 (Reuters) – Think of something new you started doing two and a half years ago to make life easier during the COVID lockdown, and today, chances are there’s a related stock market victim story.

Add in investor concerns about soaring inflation and an economic slowdown that has sent Wall Street into a bear market this year, and you get a bleak picture of companies that have become wildly popular during the pandemic.

Connected stationary bike maker Peloton Interactive ( PTON.O ) told employees last week that its fourth round of layoffs this year is an effort to save the company. Its issues have focused on other pandemic hotshots such as Zoom Video Communications ( ZM.O ), Nautilus Inc ( NLS.N ), DocuSign Inc ( DOCU.O ) and DoorDash Inc ( DASH.N ).

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Rising investors pushed Peloton shares to a record $171.09 in early 2021. Demand for its bikes has been so strong that restless consumers have had to wait out long delivery delays. But Peloton shares are now down 95% from their high, closing at $8.53 on Wednesday. The S&P 500 (.SPX), by comparison, is down about 25% from its all-time high in January of this year.

Others bought exercise equipment from Nautilus during the pandemic, pushing its shares to $31.30 in early 2021. They last traded at $1.65.

Zoom has become synonymous with online meetings as many people work remotely and even turn to video conferencing for social gatherings. But Zoom shares were last at $75.22, down from a peak of $588.84 reached in October 2020.

Internet retailer ( AMZN.O ) and delivery service DoorDash were other stay-at-home favorites. People also flocked to consumer-friendly brokers such as Robinhood Markets ( HOOD.O ) while staying at home with no sports to bet on. But after raising $85 in August 2021, Robinhood last traded at $10.66.

“These are companies with good enough ideas to get enough funding. They catch a wave like COVID, their usage explodes,” said Kim Forrest, chief investment officer at Bokeh Capital Partners in Pittsburgh. But once this growth slows down, investors will lose interest.

“They’ve kind of used up all the air in their universe and have nowhere to grow. So even though people are still using Peloton, not enough people are buying it,” Forrest said.

Daniel Morgan, a portfolio manager at Synovus Trust in Atlanta, Georgia, says Peloton may seem cheap, but he’s wary because it’s not profitable. Its price-to-sale multiple has fallen to 0.8 over the past 4 quarters from an average multiple of 6.6 since it went public in September 2019, Morgan said.

Wall Street expects Peloton to post an adjusted loss of $2.07 per share for the fiscal year ending in June, compared with a loss of $7.69 in fiscal 2022, according to Refinitiv.

Zoom is making money, and its valuation also looks cheap at 35 times earnings per share, versus an average multiple of 135 since its debut in April 2019, Morgan said.

Still, she fears a drop in her profits. Zoom’s adjusted earnings per share are expected to fall 27% for the fiscal year ending in January, compared with growth of 55.5% in 2022, according to Refinitiv.

Morgan also pointed to slowing growth at DoorDash and retail giant as they are also hurt by soaring inflation and economic uncertainty.

“Each company will have to see how their particular business model can work in a standardized environment,” he said.

Carol Schleif, deputy chief investment officer of BMO’s family office in Minneapolis, cautioned against investing in companies that look cheap and have loyal customers. It’s all about management, balance sheets and projected earnings, she said.

While one possible outcome for pandemic favorites with slowing growth could be a buyout by a larger company, Schleif is wary of that bet.

“Buying a stock because you think it’s going to go down is a risk. I wouldn’t be willing to do that with any money I didn’t want to lose,” she said. “It’s not really an investment, it’s more opportunistic.

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Reporting by Sinéad Carew, Lance Tupper and Chuck Mikolajczak; Editing by Alden Bentley and Richard Pullin

Our standards: Thomson Reuters Trust Principles.

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