SINGAPORE (May 22): In August 2005, Hurricane Katrina wiped out the American city of New Orleans. Nearly 2,000 people were killed and millions lost their homes.
The US government’s response was as inept as the calamity was destructive. The dead were left unburied and the rescuers did not show up. Many condemned the George W. Bush administration’s response as worse than that of a third world country.
The fear of the natural disaster quickly led to stock market greed. A hurricane of a different kind drove up the stocks of hardware and construction companies. Home Depot, a seller of home appliances like tools and plumbing, rose sharply in the weeks after the disaster. Lowe’s, another hardware chain, also rallied.
Construction stocks also gained from the new found urge to rebuild. Granite Construction’s stock rose 31% in the three months after Katrina. The company is a civil contractor and construction materials producer, specialising in public transportation infrastructure projects. Hurricane Katrina destroyed transport infrastructure in the American south but it was hoped that Granite could win construction contracts to rebuild the city.
However, the storm behind these stocks ended as suddenly as it emerged. Within a year of Katrina, these three stocks were below their pre-Katrina levels. The growth that the market was betting on proved to be elusive.
As with Katrina, Covid-19 has been a godsend for a new class of security — the virus stocks which have prospered during the lockdown. These include video conference provider Zoom (up 155% ytd), online food ordering and delivery marketplace GrubHub (up 18% ytd) and exercise equipment and media company Peloton (up 58% ytd). These stocks are sitting ducks once the lockdown inevitably ends.
Zoom, which is headquartered in California, has gone viral. Its users have shot up 20-fold from just 10 million in December 2019 to above 200 million in April this year. Like Google and Xerox, Zoom now belongs to the magic circle of companies whose name is used as a verb.
But the skyrocketing usage figures seem misleading. The surge is mostly from free users who can host calls of up to 40 minutes. The customer growth from paid users, however, is much lower. The user experience has also dropped with the surge in free users, and the churn rates have risen recently.
There are also privacy and security issues, which could cause Zoom aversion for some users. Higher usage numbers also means more bandwidth investment. Its margins are stalling, as there are higher costs, without a corresponding rise in average revenue per user.
Though Zoom is trading at 2,100 times net profit in FY2020, there are many more “buy” recommendations than “sell”. The street expects its net earnings to reach US$1 billion ($1.41 billion) by 2024. This would mean that its users would need to triple to 750 million, assuming ARPU remains stagnant.
Investors are betting that Zoom’s usage would expand due to an indefinite lockdown but this is a dangerous assumption. People may switch to rival video platforms like Facebook Messenger once Zoom’s novelty evaporates and its flaws irritate users. Switching platforms is just as easy as signing up.
A similar stampede has greeted GrubHub, one of the largest food delivery platforms in the US. Like FoodPanda and Deliveroo in Singapore, GrubHub has become almost a necessity in the current Covid-19 lockdown. It has 110,000 restaurant partnerships in 2,000 American cities. GrubHub’s usage has also doubled in the last year to almost 20 million.
Despite the massive surge in customers, GrubHub is on track to lose money in FY2020. If they cannot make money in lockdown, they may never turn a profit.
Operators like GrubHub have also adopted a predatory pricing policy by charging independent restaurants as much as 15% of an order, thus eating into their profits.
Though food delivery is touted as a tech business, it lacks the network effect. Unlike Uber which thrives with the expanding network of riders, food delivery companies are just body shops that cannot enjoy scale economics. A typical delivery person can only make about two deliveries per hour.
The street expects GrubHub’s revenue to rise by a third by FY2022, but it still will not break even. It may be able to deliver food, but it will be a long time before it delivers profits.
Like hurricanes and viruses, investment fads are volatile. Investors who chase the fads could join the victims of these calamities.
Nirgunan Tiruchelvam is head of consumer sector equity at Tellimer (Exotix Capital)
