The disappointing earnings results logged recently by what were once the hottest stocks during the height of the pandemic tellingly indicates that for many investors, the once auspicious pandemic trade is now over. The unique conditions that fueled many companies meteoric rise have abated. A review of some recent earnings results paints a bleak picture for some once high-flying companies, while for other companies, the current sanguine outlook reflects their rapid rebound.
The travel industry felt the full brunt of the pandemic, but there are now signs that a recovery is in progress as people resume vacation plans. The beneficiaries of this uptick are online booking and travel companies. Most companies in the industry have posted significant earnings growth in the third quarter that have, in many cases, far exceeded the Street’s consensus estimates.
One example of the reversion to prepandemic earnings levels is Airnb Inc. (ABNB, Financial). The company posted third-quarter revenue of $2.2 billion, a 67% increase from the prior year. The company’s revenue surge represented a 36% increase from the comparable pre-pandemic period two years ago.
Online booking companies also participated in the travel and leisure rebound. Booking Holdings Inc. (BKNG, Financial) saw a 77% increase in revenue; Expedia Group Inc. (EXPE, Financial) saw revenue jump 97% from the same period last year. Investors have viewed Expedia’s resounding results favorably. After hitting a March 1, 2020 low of $56.27, the stock currently trades at $188.43 — a 234% increase.
Cloud services companies that flourished during the pandemic will continue to thrive as more and more companies continue to migrate or shift to digital technologies. The scope of this technology is broad, incorporating multifarious tasks and operations such as bill and payment processing, office collaboration software and migration from in-house IT processes to on-demand subscription cloud services. Strong earnings growth from Microsoft’s (MSFT, Financial) Azure cloud unit as well as Amazon Web Services presage further expansion of these digital software offerings.
On the other side of the post-pandemic fence sits companies such as Zoom Video Communications Inc. (ZM, Financial), down approximately 21% year to date, and Roku Inc. (ROKU, Financial), sliding approximately 40% since July. Both companies' reduced earnings reflect the gradual, but nonetheless inexorable, migration back to offices, cinemas and concerts.
Perhaps no other company better illustrates investor abandonment of companies whose sudden, unanticipated Covid-19 fortunes were supposed to outlast the end of the pandemic than Peloton Interactive Inc. (PTON, Financial). After posting disappointing earnings and less-than-stellar guidance for the future, Peloton shares on Friday were off 35%. The company’s stock is down 63% in 2021 after climbing skywards with a 434% gain in 2020.
Like Roku and Zoom, Peloton has been affected by people’s desire, after a long year, to leave the cloistered seclusion of their homes. The earnings results of two companies buttresses this contention. After many analysts predicted its demise, revenue climbed 46% for the latest quarter at Planet Fitness Inc. (PLNT, Financial). To add insult to injury for those on the Street who were certain its doors would remain closed, the company’s stock, which hit a March 1, 2020 low of $48.70, is now at $95.60 per share — a record high.
The shares of concert promoter Live Nation Entertainment Inc. (LYV, Financial) are also selling at new highs. After rising from a March 1, 2020 low of $45.46, the company’s stock currently trades at $115.40— the recent tragedy in Houston notwithstanding. Live Nation posted $2.2 billion in revenue for its latest quarter, up from just $155 million in the previous quarter.
Given Peloton’s rapid descent from its lofty pandemic status, it is instructive to note the view of some analysts during the height of the Covid-19 crisis concerning the company's prospects. The comments and predictions at the time seemed to acquire a "follow the herd" mentality and is instructive about the perils of blindly following the conventional wisdom when a modicum of skepticism was in order.
Here is what Wedbush Securities, quoted in a Barron’s March 17, 2020 article, had to say about Peloton’s near and long-term prospects:
“We believe we are in the early stages of the ‘work-in’ trend, a long-term shift toward at-home fitness, based on a combination of worsening time poverty and evolving technology. Not only is Peloton arguably the company in our coverage best insulated from the current coronavirus pandemic, but increasingly we see Peloton as a potential beneficiary of widespread social distancing efforts, accelerating what we believe is already an inevitable shift.”
At that time, Peloton stock was at $25.19 per share. In a Sept. 11, 2020 Barron’s article, an Evercore ISI analyst called Peloton “the most obvious long-term beneficiary from Covid in consumer internet” and claimed that “as the company’s guidance indicates, the benefits from this unfortunate crisis are likely to prove incredibly sticky.”
Other analysts were comparing the company’s prospects to Amazon.com Inc. (AMZN, Financial) and Netflix Inc. (NFLX, Financial). Scott Devitt, an analyst with Stifel quoted in the same Barron’s article, asserted that “the gym of the future may be left mostly for muscleheads, hookups, and those in cramped living quarters, as an increasing portion of the population opt to work out in the home now that technology allows for it.”
Devitt wrote that Peloton has a “huge lead” in in-home cardio workouts and will eventually build up its strength offerings “just like [how] Amazon started with books and now is the everything store.” He further predicted that “the phenomenon will span the globe and there are significant cost advantages to building content on a global basis just like Netflix.”
Bruce Smith, founder and CEO of Hydrow Inc., possessed the acuity that seemed to be missing amidst all the “gyms-will-be-an-anachronism” hype. In a Nov.24, 2020 Wall Street Journal article, Smith noted with prescience that some people will migrate back to gyms after the pandemic. “One-third will go back as soon as they can,” he said. “Another one-third will go back gradually, like people did to flying after 9/11. And one third will say, ‘Holy crap, this thing is amazing,’ and stay with it.”
Though Peloton may bounce back and surmount its current woes, from a valuation standpoint, the stock was ripe for a correction. It is clear that the stay-at-home thesis will need to be re-examined by many of the company’s previous boosters.
