What do Peloton, Zoom Video Communications, and Beyond Meat have in common?
This is not a trick question. They all did very well from the initial lockdowns.
With people stuck at home, they swooped up perceived bargains. Peloton’s zero-interest payment plans proved to be very appealing to consumers stuck at home. The share took off like a rocket in response.
The problem is the monthly subscription for virtual exercise classes costs about the same as a gym membership. Why would anyone continue with the company when the lockdowns end?
To add insult to injury, the company is suing competitors left and right. It claims to have invented online leaderboards for performance. So far, it has had to settle one suit and is mired in two more right now.
Anyone who has played video games over the last couple of decades knows a real-time leaderboard is no big deal. I doubt investors thought the company would use the capital it raised during its IPO to fight frivolous lawsuits.
What’s less discussed is how interest-rate-sensitive the company is. It can offer interest-free credit because interest rates are low. If rates rise for any reason, it could send the company under.
Zoom calls are one of my pet peeves. The audio and video quality are often terrible. Most calls experience some form of lag, and people tend to ramble when they can see me. I miss when conference calls were simple but effective. My kids share my hatred of the app. They have been in Zoom classrooms since March.
All that attention resulted in the share doing particularly well during the lockdowns. It now has an extravagant valuation. The historical P/E (price-to-earnings) ratio is 467, and the estimated P/E of the end of 2020 is 152.
That means Zoom made almost three times as much money this year as last. That’s still nowhere near making a profit. When lockdowns end, I hope I’ll never use the app again. Every school will ditch its subscription too. The company might never make money. If interest rates rise, it could go bust because its cost of funding would rise.
Beyond Meat was one of the best-performing IPOs of 2019. It also prospered during the lockdowns. People were hoarding everything, and plant-based burgers must have seemed like a healthy alternative. Even I bought some. They taste awful. I don’t care what the label says, they taste nothing like a beef burger. I can understand the point about the water intensity of raising cattle, and how beefless burgers conserve a lot of water and energy, but I’m not compromising on flavor. Forget it.
Beyond Meat is another company with an extravagant valuation and an uncertain path to profitability. It’s also very susceptible to higher interest rates.
Technological innovation IS speeding up. There are some incredible, life-changing developments both in and coming to market. However, there’s a world of difference between the success stories and the flops.
The stock market has a lot of survival bias. Everyone knows the success stories. Very few remember the failures they stepped over to achieve greatness. A decade from now, I doubt any of the three companies I discussed above will still be around.
Meanwhile, the companies lockdowns hit hardest continue to bounce back. Survival in the face of historic adversity is what separates the long-term winners from the losers.
Another way to think about it is many of their challenges are behind them. The challenges of the lockdown darlings all lie ahead.
All the best,