We are approaching the two-year anniversary of COVID awareness entering our lives and now have almost two years of stock market returns during that time. Of course, companies have been affected by COVID and it is interesting to see where some of the Lockdown Stocks are now trading as we’ve moved toward an environment of living with COVID. Below, we highlight the divergent paths of a sampling of stocks considered to be big “winners” from COVID.

Peloton, manufacturer of exercise equipment, quickly became a shining example of a company which would thrive during a shutdown. As gyms closed and consumers had to adapt their workouts to the home, not only did sales of Peloton equipment grow, but their subscription services provided a fat, profitable tail after the equipment purchase. The stock responded, climbing from about $20 in March 2020 to the high $160s in January 2021. It’s now trading in the mid-20s, completing its round trip. The stock fell in January after it was reported the company would halt production to control costs as demand slowed dramatically.

Investors bid up Peloton on the story, overlooking a few key factors. One is competition – Peloton manufactures quality equipment, but so do multiple companies like Nautilus (which includes the Bowflex brand) and NordicTrack. In addition, 80% of Peloton sales are from the equipment, which means the company still relies primarily upon one-time purchases for revenue. Treadmills and exercise bikes are not recurring purchases – once a household purchases a treadmill they are set for multiple years. The shutdown and subsequent events likely caused a pull forward in Peloton’s sales but did not dramatically increase the company’s total addressable market. As a result, it should not have dramatically altered the valuation.

Netflix, the streaming service, was probably the most popular Lockdown Stock. The shares climbed from about $320 in March 2020 to almost $700 in November 2021 before falling precipitously when its guidance post 4th quarter results didn’t meet expectations. This was not a case of the valuation extending as Netflix had a high valuation going into the pandemic with an 80 P/E ratio. Rather, this was a case where the “story” could not sustain the valuation and the multiple contracted over the last 20 months. Nonetheless, Netflix shares have completed a similar roundtrip to Peloton as the stock trades around $380.

Investors did not increase the valuation on Netflix, instead it seemingly received a high valuation for too long. The shutdown most likely pulled forward subscribers, like Peloton, while also lowering churn (customers cancelling their subscriptions) as Netflix had plenty of available content to release. Since early 2020, the television landscape has changed and we are now in the “streaming wars” as Netflix, Disney, HBO, and others battle for eyeballs. More competition does not usually lead to higher profits, faster growth, or continued high valuations.

Zoom, the video conferencing company, was an obvious beneficiary of the Lockdown and resulting work-from-home environment. Zoom had only been a public company for about a year when the pandemic started. The stock traded around $110 in March 2020, climbed to $570 by October and has slowly descended to its current $140. In October 2020, Zoom’s P/E was over 500 and today it trades at about 40X earnings. Zoom’s earnings releases, since October 2020, have all disappointed and the stock has fallen an average of 11% after each release.

Zoom’s video conferencing usage clearly received a bump from the shutdown. However, two significant technology players, Microsoft and Google, already had a similar tool with Teams and Meet respectively. More importantly, both competitors already had a suite of complimentary products and a large enterprise customer base. Both factors limit the upside for Zoom and threaten its long-term position in the market.

Other stocks, such as healthcare diagnostic and device companies like Abbott Laboratories, Hologic and Thermo Fisher Scientific, which are not Lockdown Stocks, saw significant revenue growth during the pandemic. These companies have performed well since March 2020 but have not made similar round trips as the other names discussed have for a couple of reasons. One reason being that the valuations were not as extended as the names discussed above. Another is that it’s very clear which revenue and earnings for these healthcare companies are COVID related and which are not. As a result, analysts can discount their earnings as appropriate. With that said, management for these companies still point to the potential future sales to these new customers gained over the last year and a half. This story has yet to play out.

This is not an exhaustive survey of all Lockdown Stocks, but it does serve as a cautionary reminder to investors that the obvious “big winners” in an investment theme are not a sure thing. Our analysis always comes back to fundamentals and valuation. If we are not comfortable with a company’s expected earnings power in the next 3 to 5 years, we are not comfortable investing. Lockdown Stocks saw a surge in earnings, but the long-term viability of that surge was, and remains, in doubt – which is why we avoid COVID themed investments. We continue to invest in companies which saw revenue growth tied to COVID, but only if this growth is transparent and we have confidence in the company’s earnings power going forward.