Fortunes of Zoom and Peloton reflect risks of overpaying for latest craze
Having watched Zoom’s fortunes rise in the pandemic only to fall below pre-pandemic levels, one industry veteran is warning advisors not to get swept up by the latest craze when investing.
“Don’t get too caught up in the story of today,” Don Stuart, executive vice president of the Vancouver-based Dixon Mitchell Investment Counsel , told Wealth Professional.
“It’s easy to get caught in stories that feel compelling and make a lot of sense at the time. But, often that means that you’re overpaying because everyone’s thinking the same thing.”
Stuart pointed to COVID, when people were doing all their shopping, including groceries, online, buying gyms to work out at home, and thinking they’d never return to the office. Companies, such as Zoom and Peloton, profited from that pandemic lockdown narrative. But, Stuart said advisors who were influenced by that may not have considered those companies’ valuation and business perspective.
Zoom, for instance, may be a great company, but it peaked at $161 billion in late 2020, or 6.5 times its pre-pandemic level of $25 billion, and now is only worth $23 billion. It’s also continuing to add employees, even though it’s not adding more growth. So, it’s grown from 2,532 pre-pandemic to 4,422 at the pandemic height and 6,787 now. Stuart noted that’s not a good business model.
“It is a great company. But it probably wasn’t worth that $161 billion peak,” said Stuart. “I would say the people were overpaying by probably about tenfold what it was actually worth. With its stock, that euphoria caused it to get disconnected from the business.”
Stuart said today’s equivalent to the pandemic story is that inflation will be like the 1970s with interest rates continuing to increase, so people are repositioning or opting out of the market.
“Don’t get too connected with the story of the day and believe that it’s going to continue indefinitely and let it influence your portfolio behaviour too much,” he said. “Often, it can end badly, either because you pay too much for something or because you have become way too conservative.”
He said too much euphoria a year ago is just the opposite of too much pessimism now when people are retrenching or recoiling. “If you can find the middle ground,” he said, “you’re usually better off.”
Stuart said charting a middle path for long-term portfolios with companies with good business cases rather than following the latest narrative will benefit advisors because, “at some point, you’re going to have to justify the whole thing based on earnings and cash flow.”
“If you look at the odds going forward, when the market is down as much as it has been, your odds are probably more in your favour now than they were a year ago,” he said, “even though it doesn’t feel so great right now.”
Stuart warned advisors about getting caught up in crazes, particularly if clients are pressing them to follow the latest trend. He encouraged advisors to look at the broader perspective. When the markets fall by 25%, he said the odds favour good returns within the next one to three years. Or, given the 18 U.S. midterm elections since 1950, the one-year returns have never been negative.
He said it makes more sense to watch those trends “versus trying to jump on a momentum market with new companies that may or may not have a business model that is benefiting from a freak incident that hasn’t happened in two generations, like the pandemic.
“So, just don’t get too caught up in the story today because now the story is everything’s terrible. A year ago , the story was that everybody’s going to stay at home forever.”