The early months of the pandemic brought soaring fortunes for a handful of uniquely positioned tech companies that benefited from a work-from-home economy.
Peloton’s stock fell roughly 25 percent on Thursday as the company pursued an aggressive plan for “right-sizing” its manufacturing operations. Netflix’s stock lost a fifth of its value on Friday after an earnings report revealed its subscriber growth had slowed.
And the teleconferencing company Zoom ― which became so ubiquitous in 2020 that its name became a verb, akin to Uber or Google ― lost 60 percent of its stock value throughout 2021 as people returned to their offices.
Here’s why the work-from-home tech stars of 2020 had such a rough 2021, according to industry analysts:
Tech stocks may have been overvalued
In early 2020 investors were looking for ways to capitalize on a unique economic moment, and they gravitated toward stocks they thought would do well in a pandemic-stricken economy.
In some cases they overlooked long-term business fundamentals, says David Trainer, chief executive of the Nashville-based investment research firm New Constructs.
“Work from home was just yet another excuse to prop up extremely overvalued stocks,” Trainer said.
In the case of Peloton: “It was an illusion,” Trainer said. “All it was doing was pulling forward demand, it wasn’t changing the long-term competitiveness of the business.”
Many people left their homes and went back to the office
For Peloton in particular, the return to in-person gyms was accompanied by a sharp drop in demand for at-home workout products.
The company ran a net loss of $376 million on revenue of $805 million in the quarter ended Sept. 30, 2021. It projected sales from $4.4 billion to $4.8 billion in the year ending June 30, a guidance that was edited down by roughly $1 billion from a previous estimate.
In preliminary earnings released Thursday, the company disclosed that it expected to report a before-interest earnings loss of as much as $270 million, although a previously provided guidance suggested it would lose even more.
In a note to employees, chief executive John Foley said the company “feels good about right-sizing our production, and, as we evolve to more seasonal demand curves, we are resetting our production levels for sustainable growth.” Foley also said the company needs to “evaluate our organizational structure and size of our team.”
Two analysts told The Washington Post they thought Peloton’s stock price will probably fall even further in 2022.
“Even as we go from pandemic to endemic, you’ll probably have a different price for Peloton. … People adjust to these things and adjustments down are never fun,” said Michael Farr of the D.C.-based investment firm Farr, Miller and Washington.
Netflix and Peloton “were both work-from-home poster children, and now with more returning to some semi-normal life we are seeing a moderation of growth,” said Dan Ives, managing director for equity research at Wedbush Securities.
“These are both victims of their own success and [Wall Street] got way over its skis,” Ives said.
Competition is heating up
Both Netflix and Peloton became innovators in a fast-growing market niche ― but competitors took notice of their success.
Trainer, the New Constructs CEO, says he believes Peloton will face stiff competition from companies like Nautilus, Lululemon and Apple, all of which have connected fitness products of their own.
The long-term problem, Trainer says, is that Peloton’s core product may not be unique enough to keep competitors at bay. “There are so many alternatives out there and it’s not that hard to do in the first place; its like putting an iPad on a stationary bike,” Trainer said.
Netflix also faces stiff competition in a niche it once dominated. The company forecast 2.5 million new net global subscribers for its first quarter, compared with almost 4 million in the first quarter of 2021, according to CNBC.
In a letter to shareholders Thursday, the company admitted that “added competition may be affecting our marginal growth some,” a possible nod to gains made by Disney and others.
The company is learning that households have a limit on what they will spend for television, says Moody’s Senior Vice President Neil Begley. With streaming television, it’s easier than ever to switch from one platform to another to pick up a new show, and then switch back again.
“Given how the world has changed so dramatically over the last two years, the competitive landscape for businesses has to be rethought for many industries,” said Wayne Wicker, chief investment officer at MissionSquare Retirement.