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Finance

Beware of These 3 Overvalued Work-From-Home Stocks

Yesterday, the U.S. Centers for Disease Control and Prevention (CDC) announced that fully vaccinated people and unvaccinated individuals with a low risk of infection can resume normal working and travelling. The government is also gearing up to reopen the economy and has now ensured that the country has sufficient vaccines for all on hand or en route.

As  fears about the spread of COVID-19 have begun to abate, investors have started to look beyond  ‘work-from-home’ stocks. These are the companies that facilitated remote working and learning and have witnessed unprecedented growth in 2020. Zoom Video Communications, Inc. (ZM), Wix.com (WIX), and Fastly, Inc. (FSLY) are three such companies. They became household names during the pandemic. With their differentiated offerings, these companies helped individuals and companies to stay afloat.

However, their prospects after the re-opening of the economy look uncertain. Also, the euphoria surrounding these stocks has led to their inflated valuations. So, at this juncture, we think investors looking to bet on these stocks should be cautious.

Zoom Video Communications, Inc. – (ZM)

ZM is a video communications platform that offers its services globally through a couple of major platforms. Zoom Meetings offers HD video, voice, chat, and content sharing through desktops, laptops, conference room systems, mobile devices, and telephones. Zoom Phone is  an enterprise cloud phone system that provides secure call routing, queuing, recording, and monitoring. The company also offers Zoom Rooms and Zoom Chats.

ZM’s revenue for the fourth quarter, ended December 31, 2020 has soared 369% year-over-year to $882.5 million. Its EPS for the quarter climbed to $1.22 from $0.15 posted in the same period last year. The stock has been performing strongly amid the pandemic. However, it has key challenges ahead, which include customer retention in the post-pandemic period and  converting monthly customers into annual contracts.

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Analysts expect ZM’s revenue for the full year ended December 31, 2022 to be $3.8 billion, representing  a 44.5% increase year-over-year. Its EPS is likely to grow at the rate of 17% per annum over the next five years.

ZM ended yesterday’s trading session at $342.11, surging 195.2% over the past year. During the past six months, ZM declined 3.8%. ZM also has a stretched valuation now. Its p/e of 149.9x is much higher than the industry average  34.18x.

ZM’s POWR Ratings are consistent with this bleak outlook. The stock has an overall rating of C, which translates to Neutral in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

It has a D grade  for Value and Stability. It is ranked #36 of 79 stocks in the C-rated Technology – Services industry.

Click here to see the additional POWR Ratings for ZM (Momentum, Growth, and Sentiment, Quality).

Wix.com  (WIX)

WIX is a  developer and marketer of a cloud-based platform that allows  anyone to design a website or web application with its  built-in templates. Its Wix Editor, a drag-and-drop visual development and website editing environment tool, and Wix ADI allows  users to design a website according to their specifications. These are its  two flagship products.

During the fourth quarter, ended December 31, 2020, WIX’s revenue surged 38% year-over-year to $282.5 million, driven by a 107% growth in its Business Solutions revenue. The company’s total revenues  in the quarter rose 35% over the year to $306.4 million. Its loss per share for the quarter narrowed to $0.42 from $1.13 posted in the prior year period. At the end of the financial year, WIX had secured  200 million registered users.

However, the stock is overvalued. Its forward ev/ebitda of 162.52x compares poorly to the industry average 15.79x. Though it is performing well financially, WIX’s future performance depends on many  factors. The company must continue to report book  recurring revenue and diversify its business, while maintaining low churn and high margins to justify its valuation.

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Analysts expect WIX’s revenue for the year ended December 31, 2021 to be $1.3 billion, representing a 30% increase year-over-year. Its EPS is likely to decline at the rate of 0.8% per annum over the next five years.

Over the past year, WIX has advanced 126.6% to end yesterday’s trading session at $304.62. During the past six months, the stock has climbed 23.6%.

WIX’s dismal prospects are also apparent in its POWR Ratings. The stock has an overall rating of C, which equates to Neutral in our proprietary rating system. WIX has a D grade for Growth, and Value. It is ranked #29 of 43 in the C-rated Internet – Services  industry.

Click here to see the additional POWR Ratings for WIX (Momentum, Stability, Sentiment, and Quality).

Fastly, Inc. (FSLY)

FSLY is a cloud-computing service provider that secures its client’s applications. The company’s edge cloud platform allows  clients to deliver better online experiences.by building, securing, and enhancing digital experiences. FSLY’s clients hail from  the entertainment, technology, e-commerce, travel and hospitality industries.

During the fourth quarter, ended December 31, 2020, FSLY’S revenues rose 40% year-over-year to $83 million. Its enterprise customers generated 89% of its trailing twelve-month total revenue. Its total customer count stood at  280. Its loss per share for the quarter expanded to $0.40 from $0.15 posted in the same period last year. And it ended the fourth quarter  with $216 million in cash and cash equivalents.

Analysts expect FSLY’s revenue for the quarter ended March 31, 2021 to be $85 million, representing a 35.1% increase year-over-year. Its EPS will  likely  decline at the rate of 0.8% per annum over the next five years.

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FSLY’s valuation doesn’t justify its fundamentals. Its forward ev/sales ratio is 19.22x, which is much higher than the industry average 4.12x.

FSLY has surged 241.4% during the past year to close yesterday’s session at $69. Over the past six months, the stock has retreated  20%.

FSLY’s gloomy prospects are reflected in its POWR Ratings. The stock has an overall rating of F, which translates to a Strong Sell in our proprietary rating system. FSLY has an F grade for Sentiment, Value and Quality as well. Among the Technology – Services stocks, it’s ranked 79th out of 79.

In addition to the POWR Ratings grades I’ve just highlighted, you can see FSLY’s ratings for Growth, Stability and Momentum here.

The POWR Ratings are calculated by considering 118 different factors with each factor weighted to an optimal degree.

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ZM shares were trading at $339.49 per share on Wednesday afternoon, down $2.62 (-0.77%). Year-to-date, ZM has gained 0.64%, versus a 4.28% rise in the benchmark S&P 500 index during the same period.

About the Author: Namrata Sen Chanda

Namrata is an accomplished financial journalist, with nearly a decade of experience. She specializes in interpreting news releases and framing investment strategies, and has worked with some of the leading companies in real estate, banking, insurance, mutual funds, financial research, fintech, and investment education. More…

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