Stock market indices such as S&P 500 and the Nasdaq are trading at around 2% all-time highs at the time of writing. But just because market averages remain strong doesn’t mean all is well. In fact, many stocks are trading well below their 52 week highs, including Focus on video communications (NASDAQ: ZM), Interactive platoon (NASDAQ: PTON), and Magnite (NASDAQ: MGNI).
These three stocks were big winners in 2020, up 396%, 434% and 276%, respectively. As we’ll see, there are good reasons to buy and hold on to these past winners, but all three companies are down about 40% from their 52-week highs as investors abandon their long-term theses. . Here is why giving up these actions so soon is a big mistake.
But we are back to normal!
In 2020, Zoom enabled people to continue their social and professional lives while physically distancing themselves to prevent the spread of the coronavirus. But the situation is changing rapidly. Half of America’s adult population has now received a dose of a coronavirus vaccine, and about a quarter are already fully vaccinated.
Investors fear the once ubiquitous Zoom appeal may be an afterthought in a post-pandemic world. But the management of the company does not see it that way. Of course, it doesn’t expect to match its 326% annual revenue growth starting in 2020, but Zoom continues to forecast 42% growth in 2021 – over $ 1 billion more in additional revenue. That’s an impressive growth rate for any business, and it’s particularly impressive following such a historic year. And the leadership has given this fully conscious direction that the world is starting to get back to normal.
Much of the optimism in management comes from its Zoom Phone product. Many Zoom video customers have increased their spending to include an overhaul of their voice infrastructure. The bundling of voice and video makes sense, giving Zoom the upper hand in contracting with more of its customers. And as employees return to the office, it increases the likelihood that businesses will view Zoom Phone as a timely and necessary upgrade.
However, the real wild card for Zoom, in my opinion, is its option going forward. It generated $ 1.4 billion in free cash flow in 2020 and ended 2020 with $ 4.2 billion in cash and marketable securities, giving it plenty of firepower to pursue other business opportunities. in the workplace management space. In addition, management is actively looking for suitable businesses to acquire now, which gives Zoom more potential for expansion.
But the gyms are reopening!
Similar to the fears of investors on Zoom, many are dropping out of Peloton because physical gyms have a clear path to full reopening. For example, consider that 90% of Planet Fitness the gyms are now open. In short, the home fitness space had little competition in 2020, but the competition is back.
Taking advantage of the large open market, Peloton doubled its revenue in fiscal 2020 (ended June 30, 2020) to $ 1.8 billion. On a calendar basis, revenues increased 139% last year. But those who write off Peloton are forgetting something important: Its compound annual revenue growth rate has been over 100% since 2017. In other words, the FY20 result was not an anomaly.
Plus, something big is happening below the surface with Peloton. When the company sells a treadmill or stationary bike, it also begins to collect subscription revenue for its interactive content. In fiscal 2020, around 20% of total revenue came from its subscription segment – on par with the previous year. But as this subscription service evolves, its profit margin increases. Subscription revenues had a gross margin of 43% in fiscal 2019. In 2020, they had a margin of 57%.
Peloton forecasts revenue growth of at least 123% in fiscal 2021, even as gyms reopen. And its profitability increases with the subscription business. To me, its long-term outlook still looks very bright.
But the benefits are limited!
Since its initial public offering, the shares of The Trade Desk are up over 2,000%, making them one of the biggest winners in the market over the past five years. In 2020, investors began to view Magnite as a younger version of The Trade Desk – an unfortunate comparison leading to unrealistic expectations.
The Trade Desk is a demand-side advertising technology company, while Magnite is the largest independent supply-side ad-tech company. We need both the demand side and the supply side, yes. But players on the supply side are partnering with publishers rather than advertisers. And since there are more advertisers than publishers, players on the demand side logically have longer growth avenues.
It seems investors are waking up to the more limited rise in ad tech players on the supply side and are now ditching Magnite stock. But just because the space is smaller doesn’t mean the stock can’t beat the market here.
According to a recent survey from the Bureau of Interactive Advertising, 60% of advertisers plan to shift spending from linear TV sources (like cable) to connected TV (CTV) in 2021. And eMarketer expects the spending of CTVs almost reach double just over the next two years. This undeniable trend is also benefiting supply-side companies like Magnite and a smaller competitor. PubMatic. But being the biggest supply side player in the space has its advantages, as illustrated by Magnite’s recent deal with Innovid.
Innovid is a company that offers more interactive ads to CTV, and they just announced their partnership with The Trade Desk and Magnite to increase adoption. Interactive ads can increase consumer engagement, which is why advertisers can increasingly embrace this style of CTV advertising. And I don’t think it’s a coincidence, Innovid chose Magnite as their partner – as the bigger players, Magnite and The Trade Desk have a size to increase the chances of the project being successful. Indeed, the Magnite scale is part of the reason why I consider it a better way to play the CTV trend.
Do not give up
Investors shouldn’t be going against the grain just to be different. But when you have good reasons to invest against the grain, it can pay off. I think that is the case with these companies. Zoom, Peloton and Magnite may have fallen out of favor in recent months, but if they continue to capitalize on their long-term opportunities, Wall Street will eventually return to these stocks, rewarding investors who have patiently endured these periods of decline. slow-down.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Questioning an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.