No relief from work-from-home stock selloff

Stocks that played to working from home themes were the heroes of 2020, but they were crushed in 2021 with the damage continuing this year.

Zoom Video Communications Inc., (NDQ: ZM) which has become a household name is down 64% in the past 52-weeks. Teladoc Health Inc., (NDQ: TDOC), a leader in telehealth services is 59% off its high. Roku Inc. (NDQ: ROKU), which streams movies and TV shows has shed 62%in the same period.

Analysts say the bad news is that if you own these stocks, it’s too late to sell and they are unlikely to regain their highs any time soon. The good news is that the best of them will continue to thrive in the year ahead showing more separation between winners and losers.

“I certainly don’t see Zoom going away anytime soon or DocuSign or Pelaton,” says Greg Taylor, chief investment officer at Purpose Investments Inc. in Toronto. “It’s just how do you value them?

“The last two years they have seen massive growth, but the question now is what level of demand is sustainable? What is normal? How much of that growth was inflated?”

Elliot Johnson, chief investment officer at Toronto’s Evolve Funds Group Ltd. agrees the innovations are here to stay, adding that he views stay-connected and stay-at-home stocks as much the same thing.

“In our view the workplace has permanently changed as a result of the pandemic,” says Mr. Johnson.

The technology stock selloff is revaluing the companies based on expectations of slowing growth and so lower earnings multiples. The new multiples recognize that two pandemic years pulled a lot of business forward and those growth rates cannot be sustained as conditions return to normal.

Mr. Johnson says Zoom is a good example of the repricing. Its current price to earnings (PE) ratio of 34 compares with 194 at the height of the second covid wave.

 Mr. Taylor adds that pre-pandemic Zoom “was an $80 stock, so it’s still up from what it was. It has become an essential tool for people. It has a good business model and just has  to figure out a way to keep growing.”

Mr. Johnson argues the pandemic has proved employees can be as productive, if not more so,  working from home. As the job market becomes more competitive more employers are moving to hybrid work policies. This is another reason these technologies will be in more demand. 

 Mr. Taylor actively co-manages the Purpose Global Innovators Fund ETF (TSX: PINV) with a focus on enterprise software, consumer technology, robotics and engineering, cloud and infrastructure.  

Evolve markets several passively innovation funds. The Cloud Computing Index Fund ETF (TSX:DATA), holds most of the large cloud data firms. The Evolve Innovation Index Fund, (TSX: EDGE) broadly covers disruptive technology.  It was a 2021 Refinitiv Lipper Fund Award winner for best global equity fund over three years.

The pandemic played to ARK’s strengths which included stay-at-home trends such as internet and communications stocks.

In a mid-January webinar, Ms. Wood was unphased by the retreat and reiterated a conviction that artificial intelligence, electric vehicles, and medical revolutions will change our lives.  She said there is no rolling back the changes and the selloff is overdone.

Her fund’s biggest holdings after Tesla are Zoom, Teladoc and Roku. She noted that Zoom’s user base has gone up 10-fold since 2019 to 220 million users. Revenue has risen six-fold. Its product is integrated with Microsoft Teams, which is making the combination a dominant force in remote work.

She believes Teladoc will be the backbone of the health care system. Its revenues are up four-fold since 2019 with expanding margins, she said.

 “This the real deal. These changes are permanent. We are not going back to more expensive, less creative, less productive. We are going to continue moving forward,” she said.

So what should investors do?

“It depends on your time horizon,” says Mr. Taylor.” I think 2022 is going to be a very volatile year, but if people have faith in the business models there are some great opportunities.”

Adds Mr. Johnson: “If you believe our thesis is correct, you want to continue to own the names that have got remote work tied to them. Zoom is a good example. Microsoft is a good example. This market has been tough in the past 12 months, but valuations are back into a sweet spot.”

This is an updated version of an that article appeared in the Globe Advisor section of the Globe & Mail’s Report on Business on Feb 23, 2022. For reprint information please view this page.