Here's why Peloton and Zoom could still have room to run in a post-pandemic world

Published Wed, Nov 25 202010:50 AM EST

Peloton and Zoom are some of the biggest winners in the basket of "stay-at-home" stocks, or names that have benefited from pandemic-induced lockdowns. Both companies have made the transition to a lockdown lifestyle easier for many Americans confined to their homes. Zoom's video chat software became the go-to solution for work meetings and staying in touch with family and friends. Peloton served as an appealing alternative for fitness buffs who could no longer make trips to the gym. But Zoom and Peloton's meteoric rise has dampened in recent weeks, after positive coronavirus vaccine data suggested there could soon be a way out of the pandemic. The news sent shares of pandemic high flyers sharply lower, shaving billions off of their market value. It also raised questions about the sustainability of Zoom and Peloton's businesses in a post-pandemic world. Some Peloton and Zoom users will revert to their old habits once life returns to normal, but there's reason for optimism because both companies have provided a compelling story for users to keep relying on their products, even when they're no longer required to remain indoors. Put simply, many of the "behavior changes" that took place during the pandemic will prove sustainable for Peloton and Zoom in the long term, said Gene Munster, co-founder and managing partner of Loup Ventures. "For Peloton, what the pandemic has pushed is this awareness that you can have community and convenience at home," Munster said in an interview. "There's some similarities to the case of Peloton with Zoom. Now we have a system of convenient meeting that is accepted and even though usage will decline after the pandemic, the periodic usage will justify a growing base." Many of the new customers lured via the pandemic are likely to have grown acclimated to the ease and convenience of these services and they may not want to give that up. Additionally, both Peloton and Zoom have recently rolled out new offerings that offer lasting value beyond their core products. Their stocks have massively outperformed the broader market this year. Shares of Zoom have soared more than 553% year to date, while Peloton is up over 280% this year. By comparison, the S & P 500 is up about 11% year to date. Once the economy reopens, it's unlikely that stay-at-home stocks will continue to climb at the same dizzying pace, said Bill Smead, chief investment officer of Smead Capital Management. "There is the inevitable bear market in those stocks that happens from everyone crowding into them," Smead said. "It will be vicious because the gains have been so historically spectacular." Just like the dot-com bubble, there will be companies boosted by the stay-at-home economy that no longer prove successful and disappear, Smead said. But there could be a few winners that can manage to keep up their pandemic-fueled run. Take Amazon for example, which saw its valuation soar during the dot-com bubble along with a slew of other tech companies that later fizzled out. It managed to find its footing after the dot-com bubble burst. Fast forward almost two decades later and it's riding the pandemic-fueled e-commerce surge . "It's about doing one thing well and expanding. Amazon wrote the playbook on that," Munster said. "That's what's going to separate some of these companies that have the boost because of the pandemic vs. those that are in the shortlist of truly transformative companies." Here's a closer look at why Zoom and Peloton may still have some room to run in a post-pandemic world. Zoom's hope beyond the WFH wave Newly remote workers have turned to a variety of services for their virtual conference calls, from Microsoft Teams to Google Meet, but only Zoom has become a verb. "It's become the gold standard for ease around conferencing," Munster said. "They've become a household name and a verb. That's powerful." The pandemic has handed Zoom more success than just name recognition. The company has reported triple-digit revenue growth for the past two quarters and it now has a market cap worth more than IBM and AMD . That growth will slow once workers return to the office and engage with the service slightly less than they did during the pandemic, Munster said. Employees may join only one or two Zoom calls a day vs. five or six like they did while working from home full time. Companies may also pare back the number of accounts they pay for, he added. "Ultimately, the employer is going to want certain types of work situations and those are going to be more in person in the future than they are today," Munster said. "That's just a headwind for Zoom growth." The well isn't expected to dry up completely, however. Loup Ventures expects 20% of "knowledge workers," which it classifies as roughly 50 million members of the U.S. labor force, to continue to work remote full time or part time in a post-pandemic world. That will still create some lasting demand for Zoom conferencing services, even if it's not at the peak levels experienced at the height of the pandemic. Zoom counted more than 300 million daily meeting participants in April, up from 10 million a day in December 2019. Like any "freemium" service provider, Zoom's biggest challenge is to convert users of its free video calls into paid subscribers. Zoom's latest earnings results suggest it's finding some success. The number of large customers, or those that spent more than $100,000 in revenue in the last year, more than doubled year-over-year to 998. This, along with less customer churn than expected, helped revenue grow 355% on an annualized basis in the fiscal second quarter. The company also needs to prove it can be more than just a videoconferencing service. Wall Street analysts have highlighted its Zoom Phone cloud-calling service as one offering that could prove promising in the future. Zoom Phone taps into the private branch exchange market, which is a phone system relied on by most enterprises. The market is competitive and includes players like Cisco and RingCentral. Zoom has said that Zoom Phone revenue remains immaterial now, but that could change over time. Mizuho analyst Siti Panigrahi, who has a buy rating on Zoom, estimated in a recent research note that the offering could be worth about $58 billion "should Zoom Phones replace every legacy PBX line" at $10 per user each month. "The product is somewhat of a natural upsell to existing Zoom Meetings, in part because of that customer already having Zoom as a cloud solution for video, and likely having already moved other workloads to the cloud, with their PBX being the last remaining workload in their data center," Panigrahi added. 'The Apple of fitness' Similar to Zoom, Peloton appears to be set for additional growth beyond the pandemic, thanks to its increasingly diversified slate of products and ability to lock in users via its virtual workout classes. One key difference is that while workers will eventually be forced to return to the office, they don't have to keep paying for a gym membership if they no longer consider it valuable in a post-pandemic world. Loup Ventures estimates that about 6.5 million, or roughly 10%, of former gym members will permanently ditch their membership to stick with at-home exercise options like Peloton. Peloton likely captured 900,000 paying U.S. subscribers out of the 6.5 million former gym members during the pandemic, Loup Ventures said. In its fiscal first quarter, Peloton said it now counts more than 3.6 million total members. More than 1.3 million members, referred to as connected fitness subscribers, are paying for both its hardware and fitness classes. That's up from 563,000 connected fitness subscribers at the beginning of last year. Coupled with a retention rate of roughly 88% per year, Munster said he's bullish on Peloton even after the pandemic subsides. "I think they've got massive opportunity," Munster said. "They've effectively become the Apple of fitness, in that they now have this vertically integrated hardware and software." Beyond hardware and software, Peloton is also finding new ways to innovate on the content its connected fitness subscribers can access. Earlier this month, Peloton announced a multiyear partnership with Beyoncé to work on "various forms of class curation," such as themed workout experiences. Analysts at KeyBanc said in a recent note to clients that these kinds of programming are what will ultimately set Peloton apart from other connected fitness companies. "Ultimately, we think that Peloton's long-term value comes from its compelling and innovative program," the analysts said. "A partnership with Beyoncé across multiple fitness categories demonstrates the cultural relevance of Peloton as well as overall importance to the music industry." In order to keep attracting new users, Peloton may want to adopt Apple's pricing strategy, Munster said. Apple can appeal to a broad slate of consumers via a wide range of price points — its entry-level iPhone SE costs $399 while the latest iPhone 12 Pro Max goes for $1099. Peloton still has a ways to go before it will be truly affordable. The company recently dropped the price of its original exercise bike to $1,895 from $2,245 and introduced a cheaper treadmill for $2,495, but it should try to aim for a "sweet spot" of $750, Munster said. "If I was Peloton, I would be trying to get there as fast as possible because it's really all about getting people on that subscription, getting them essentially hooked on the service," he added. "That's where the leverage is."

Peloton bike

Source: Peloton

Peloton and Zoom are some of the biggest winners in the basket of "stay-at-home" stocks, or names that have benefited from pandemic-induced lockdowns.

Both companies have made the transition to a lockdown lifestyle easier for many Americans confined to their homes. Zoom's video chat software became the go-to solution for work meetings and staying in touch with family and friends. Peloton served as an appealing alternative for fitness buffs who could no longer make trips to the gym.

But Zoom and Peloton's meteoric rise has dampened in recent weeks, after positive coronavirus vaccine data suggested there could soon be a way out of the pandemic. The news sent shares of pandemic high flyers sharply lower, shaving billions off of their market value. It also raised questions about the sustainability of Zoom and Peloton's businesses in a post-pandemic world.

Some Peloton and Zoom users will revert to their old habits once life returns to normal, but there's reason for optimism because both companies have provided a compelling story for users to keep relying on their products, even when they're no longer required to remain indoors.